RACHEL SMITH: Please
welcome J.L. Collins. [APPLAUSE] J.L. COLLINS: Thank you. RACHEL SMITH: You're welcome. So my first question for
you, the title of your book is "The Simple Path to Wealth." J.L. COLLINS: It is. RACHEL SMITH: And it's a roadmap
to financial independence and a rich, free life. So what does wealth
mean to you, and how is it tied to a free life? J.L. COLLINS: Well, I
suppose we could look at that in two different directions. So if we think about the
psychological part of it, to me, personally,
what wealth represents is security and freedom. So security to protect you
from what the world can throw at you, and freedom to
chart your own path in a way that you couldn't do
without the resource. On the financial
point of view, I suppose when I think about
what the benchmarks are for are you wealthy or
not, have you achieved financial independence
or not, what has come to be called the
4% rule is a good guideline. That comes out of a thing
called the Trinity study. And without
belaboring that point, it simply suggests
that if you have enough assets that
4% of that amount can cover your
annual expenses, you can consider yourself
financially independent. So you can work at it from
two different directions. You could say, well, I have a
million dollars, so 4% of that is $40,000. Can I live on $40,000
a year or not? And therein lies the
answer to your question. Or you can look at it
from the other direction. You can say, you know, I
need $40,000 to live on. So how much do I need to
be financially independent? You multiply $40,000
by, as it happens, 25, you get a million dollars,
and there's your answer. So it really depends
on what your needs are. RACHEL SMITH: And why
is it important to keep the path simple? I think there are a
lot of folks tuning in or folks in the
audience who have read financial independence
books, and maybe their eyes roll back in their
head, because they just can't make sense of it all. So why is it important
to keep it simple? J.L. COLLINS: Well,
that's one good reason. But the reason that I
prefer keeping it simple is simple is simply
more powerful. Simple is what gets
you the best results. And in this case, when
I talk about simplicity, I'm talking about index funds
and specifically broad-based stock and then bond index funds
when you bring them into it. There are a lot of reasons that
simplicity is an advantage. It keeps your costs low. It keeps your life simpler. It makes things, when the time
comes, easier on your heirs. But the most important thing
is it is the most powerful way to reach financial independence. People who come to
my blog are always-- I get two kinds of
readers of my blog. People who are really
into this stuff and they always want to
tinker, and that's not who I'm really writing for. I'm writing for people
like my daughter who knows that it's
important, but she has other things that she'd
rather do with her life than fixate on
finances and investing. And so when you
have a simple path, you can just get a
couple of things right. You'll have a very
powerful performance. You will outperform the vast
majority of professionals out there. And I am fond of saying to
those people who want to tinker, if I thought there was a way
to successfully tinker and do better, then that's what I would
have written the book about. And in fact, I wasted a couple
of decades trying to find that. RACHEL SMITH: So you have
a blog, jlcollinsnh.com. If folks are interested
in your content, should they begin with
your blog or your book? J.L. COLLINS: I would suggest
that if you don't know anything about me or this concept, I
would go first to the blog. And I would go to-- there's a
button at the top called Stock Series, and the
blog is best known for my stock series of posts. And when you click
on that button, that will take you
to an introduction. And in that
introduction is a link to what I think is the best
review of my stock series that's been done-- and not best because
it's most favorable, but in my view most accurate. So you can click over to that
and read that brief review. And after reading it,
you'll know very clearly whether this is going
to resonate with you or not and whether
it's worth your time. So I'd start there,
and then I would read a couple of the posts. And then if you
like what you read, you can consider
going on to the book. There is nothing in the
book that's not in the blog, so you can get all
the information just by staying on the blog. The book is more concise. It's better organized,
because the post and the blog came organically as
they occurred to me or were suggested. And the book has the advantage
of being better organized. It's more concise. I spent more time
polishing the writing so, I hope that the writing
is more polished. But you'll make
the judge of that. RACHEL SMITH: Got it. And thinking back to the early
days of your own investment history, how did you
learn all this stuff? How did you learn to invest? J.L. COLLINS: Well, I
did it the hard way-- trial and error. I spent, as I alluded to
earlier, decades trying to do things that were not-- what's seductive about
this is that they were subpar but not bad performance. I tell people that long
before I discovered or embraced indexed
investing, I'd reach financial independence. So I reached financial
independence by picking stocks and picking mutual fund
managers-- active managers-- who could pick stocks or
thought they could pick stocks. So it can be done. The problem with it is
it's more expensive. It's more time consuming. It's not as effective
as indexing. So I would have been
much better off if I'd discovered indexing earlier. The great irony is
that Jack Bogle, who is the founder of
Vanguard and the inventor of the first index fund
available to the public, launched that fund in 1975. 1975 was the first year
I started investing. I never heard of Jack Bogle
or Vanguard or index funds when I started. It was 10 years before
I heard of them, and then it took me a
disturbingly long time to embrace it. So people say, how do
you know all this stuff? I it's, well,
because I made just about-- if you can
think of a mistake you can make in investing,
I've probably made it. So to the extent that I know
anything is from my mistakes. RACHEL SMITH: So
speaking of mistakes, what do you think was working
in your favor versus working against you as you were trying
to figure this out on your own? J.L. COLLINS: Well, I think
the main thing that was working against me at the time and that
is working against everybody listening to this is there
is a large industry-- Wall Street-- whose drumbeat is
counter to our best interests. And it is based on making
this as complex as possible, putting out a siren
song that you, too, can be Warren Buffett. You, too, can pick stocks. You, too, can
outperform the indexes-- only if you're willing to
pay us for the privilege. And that's a very
seductive message, because everybody wants to think
that they can be above average and outperform. RACHEL SMITH: You're in a room
full of above average people. J.L. COLLINS: Well, right. But maybe not in investing. Now, the irony is if you
invest in index funds-- and, of course, the slam
that active managers put against index investing
is that you will only get average returns. That's a little bit misleading,
because yes, the index gives you the return
of the market overall. But that return is
far above average. Index investing, based on the
research that has been done, outperforms-- depending on
what numbers you look at-- 80% to 85% of active managers
over a 15 year period of time. If you research out
30 years, the number of active managers who
can outperform the index is less than 1%. That's statistically zero. So when you invest in
the index and you're getting the average
performance of the market, you're actually getting
the best performance that you can expect
by a long shot. RACHEL SMITH: And so what
was working in your favor? J.L. COLLINS: I think
was working in my favor is I continued
being curious, and I continued trying
different things, and I continued researching. And indexing, which was
first put in front of me in 1985 by a good
friend of mine-- there's something about it
that is very counter-intuitive, and I think particularly
for smart people like the people in this room
and the people listening. Because you look
at it, and you say, well, indexing says I buy
every stock in the index. And yet, if I can only just
not buy the obvious dogs, I'll outperform. I mean, outperforming seems
like it should be so simple. But the problem with that-- or even if I just buy the
top performers and not even buy the mediocre or
the low performing ones. Obviously, I'm
going to outperform. And yet, you look
at that research that says that doesn't happen. And of course, the
reason it doesn't happen is today's dogs are sometimes
tomorrow's great turnaround success stories. And those that are flying
high are the stories of how they crash and burn. So there is no way
to know what is going to happen with specific stocks,
and it is just way too easy to guess wrong. RACHEL SMITH: So one
thing that struck me about your blog and your book
is how specific the advice is. So in other books or websites
I've tried reading in the past, the advice was
always really vague, like invest in mutual funds. And it would leave me thinking,
well, which one, and how much? So why do you think other
authors' advice is not very specific? J.L. COLLINS: Well, I'm
not sure I can answer that, because I can't put myself
in the heads of other people. Maybe I can answer
it by telling you why my advice is what
it is, and that's because I didn't write
this blog to have the international audience
that I have today. It never occurred to me
that that would happen. I had started actually
writing a series of letters to my daughter about financial
things I wanted her to know. And I shared it with a
business colleague of mine, and he said, you know, Jim,
this kind of interesting stuff. You might want to share it
with your friends and family, and a blog would be a
good way to do that. And this is in 2011. I like the idea of a blog,
because it occurred to me that it would be a great way
to archive the information. But I didn't have a plan to
create a blog as a business or as a successful way to
reach a broader audience. It was just to archive
the information I wanted my daughter to know. And that was basically
what mistakes I've made, what's worked,
what's kicked me in the ass, and what I think
specifically she should do. And so I think that's why
my advice is so specific. These are the things
that I'm doing now. These are things
I wish I had done in 1975, or at least in
1985, when I became aware of indexing. These are the things
that I want her to do and that I've got
her started doing. So that's maybe why my advice
is more specific than others. RACHEL SMITH: OK. I can't tell you
how many times I've talked with a friend about
how I'm on this new track where I'm investing, and they
say, well, what are you doing? And I just send
them one sentence of exactly what I'm
doing, and that's what I read in your book. And they're like, that's it? And I'm like, that's it. That's all I'm doing. So aside from telling them to
open their computer, start it up, and what clicks to make
to log into their account, it's such simple advice. J.L. COLLINS: You know,
a year and a half, two years ago, I was
interviewed by Farnoosh Torabi on her podcast. And I don't know if anybody
has listened to her podcast, but at the end of
her interview, she likes to ask a
question that says, if you were suddenly given $100
million, what would you do? And the typical kind
of answers she gets is, well, I'd buy this, that. I'd give this money away. I'd do that. And of course, she's
interviewing me. We're talking about index fund
investing, and specifically VTSAX, which is Vanguard's
total stock market index fund and the one I recommend
the most and love the best. So when she got
to that question, she said, Jim, you've got $100
million, what would you do? I'd put it in VTSAX. And she goes, really? That's what you'd do? RACHEL SMITH: So one of my
favorite posts on your blog is called "Why your house
is a terrible investment." And I know you got a lot of
feedback from your readers about this. J.L. COLLINS: Yeah,
feedback's one way to say it. RACHEL SMITH: So
why do you think this post is so controversial? Why do your readers get so
excited about this post? J.L. COLLINS: You know,
not me, but somebody said, home ownership is the
American religion. And you could go to Dealey
Plaza in downtown Chicago, and you could set up
your little soap box. And you could climb up on it and
pick any major religious leader and begin to vilify
that individual-- Jesus Christ, Muhammad, Buddha,
who ever-- just vilify them in the most horrific
terms possible. And people would just
turn around and walk away. They'd ignore you. You get up on that
same box and suggest that home ownership isn't the
perfect thing for everybody to do, and they started
gathering rocks. So I think it's polarizing. And the people who
love their homes and love the idea of owning a home-- that gets that response. And then there's another
segment of people who don't like owning homes
and see value in renting, and they muster to the cause. And that's what makes that
post, to my surprise-- because I kind of did
it tongue in cheek. And by the way, I'm not
anti-home ownership. I've owned homes
most of my life. I am anti-believing
the propaganda that it is always
or even commonly a good financial decision. It can be a great
lifestyle decision, and that's why I bought the
houses I bought over the years. But I never once
bought them thinking I was doing something that
was financially astute. Because unless you happen to
get lucky with a rising market-- and that does happen-- it's generally
not the best thing you can do with your money
if financial independence is your goal. RACHEL SMITH: And
so for the person who is at the point
where they're considering buying their first home or
condo, what considerations would you advise them to
make before they do that? J.L. COLLINS: Well, I think
the first thing along the lines with what I just said was to
understand that you are not making an investment, you're
making a lifestyle decision. In my manifesto on my
blog, one of the things that I say is something to the
effect of all of our decisions don't have to be driven by
financial considerations. But you should always
understand the financial dynamic of what you're choosing to do. And I have a post
about buy versus rent and run the numbers, which talks
you through how to do that. So I would suggest,
if you're renting now and you're thinking of going
into a house or a condo, that you first run the numbers
and find out exactly what it's going to mean financially. And it might be that it's going
to be less expensive than what you're renting. That's possible. That does happen. More commonly,
you're going to find that it's going to be more
expensive, but then you know. And just because
it's more expensive doesn't mean that you don't
have to buy the house. It just means that
you understand what you're paying for
the lifestyle decision that you're making. RACHEL SMITH: And that was
one of the first conversations we had at the Chautauqua. I wanted to tell you a
story about how I frequently get asked, Rach, are you going
to buy a place in Chicago? And I say, well, I read
J.L. Collins' book, and I'm cool renting for now. I told you a story about how
my refrigerator broke right before I came to Ecuador,
and just called my landlord and said, I need a new fridge. See you later. I'm going to go out of town. So other than this
post called "W your house is a
terrible investment," is there any other
post on your blog that's generated a lot of
feedback or controversy from your readers? J.L. COLLINS: Well,
that's the one that's generated the most controversy,
because it's such a hot button topic. Less controversial
but very popular-- probably the two
that are most popular is "How I failed my daughter"
and "The simple path to wealth," and that was
one of my earliest posts. And in that one post,
I kind of sum up the whole content of the blog
in the book, so that's popular. "Why you need F-you money" is
probably at least as popular. From the reaction
of the audience, I gather we have people
who agree with that. RACHEL SMITH: There's
a famous video on YouTube called "The
importance of F-you money." So those of you who haven't
seen it, write it down. Put your headphones
on at your desk. J.L. COLLINS: Yeah, it's
not suitable for work. So just a quick aside
on that, if I may. There's a movie called
"The Gambler," which is not a particularly
good movie, so I'm not
recommending the movie. But there is a
wonderful segment. It stars John Goodman,
who's a wonderful actor. And there's a wonderful segment
little piece in that movie-- and you can Google that
and find this clip-- where John Goodman is
talking to Mark Wahlberg about the importance
of having F-you money. And when I saw that
clip, I thought, I want to do a version of that. I want to keep it as
close to the original as I can, but tweak it
so it reflects my values. He talks about buying
a house, for instance, and we've talked about that. But my problem is, I
didn't know anybody who could make the film. But one of the wonderful
things about Chautauqua, which is where you
and I met, is that you meet really cool,
interesting people who come to Chautauqua, including
a couple of years ago a pair of filmmakers who
were less than an hour from where we
living at the time. And they came up-- and I
give you all this background, because if you
choose to watch this, it's filled with salty language
that I don't use every day. I'm acting. I'm trying to
channel John Goodman, and he uses the same language. And if you like it, you
think I do a good job in it, the credit goes to my
filmmakers, Joan and-- terrible, I'm drawing
a blank on his name. But if you go to my blog and
you do the search function, you'll find it, and you'll
see the credit is given. RACHEL SMITH: So we're
in the beginning of 2018, and this is a good
time for folks who are trying to get their
financial house in order to maybe come up
with a 2018 plan-- 2018 and beyond. And the amount of
investment options is confusing and overwhelming. So I know a lot of folks who
are maxing out their 401(k), because that's
very sound advice. We get the full match. They might also have an
emergency savings fund. But beyond those
two things, they don't know what to do
with what's left over. And they're just keeping their
money in savings or checking, or maybe they're outsourcing
the management of their money to someone else. So for the folks who
don't feel confident investing beyond just the
401(k) match and they're just keeping their money
maybe in savings or checking, how should they
begin to make sense of all these different options? How would you advise
them to get started? J.L. COLLINS: Well,
in a way, this circles back to the advantage
of things being simple. So if you have a visual image,
let's say, of a long banquet table that is just groaning
under the weight of every kind of food and preparation and
dish you can possibly imagine. Think of that image as what
the financial community has laid out for us and that
they want us to partake in. The problem is these are all
very expensive things that are, for the most part,
designed for the people who have created them and
who sell them to enrich them, not necessarily
what's best for us. That's the bad news. The good news is you
can put your arm down on that table at one end
except for a tiny little corner and sweep it all
under the floor, because none of that matters. Only a very small sliver
of what's out there really matters for us in
building our wealth. That's index funds, and
that's very specifically broad-based stock index funds
and broad-based bond index funds. I mentioned the one
that I like the best is VTSAX, which is Vanguard's
total stock market index fund. More common-- and the original
fund Jack Bogle created-- is the S&P 500 index fund. That's perfectly acceptable, and
the two are surprisingly close. So sometimes people get hung
up on deciding between them. If you have access to
one and not the other, go for whichever one you have. And then there are
total bond market funds. With those two tools,
that's all you really need. It gets a little complex with
401(k) plans and 403(b) plans for people who are not
in the private sector, because they don't always
offer those particular Vanguard funds that I prefer. Most plans offer some
kind of broad-based stock index, usually an
equivalent of an S&P 500. It might not come from Vanguard,
which is my preferred company, but an S&P 500 index fund
is pretty much the same no matter who's providing it. Fidelity or T. Rowe Price--
those are all fine options. RACHEL SMITH: OK. And so if someone wanted
to get started this year and they wanted to take a
look at some index funds, but they also know
that there are HSAs, 529 plans, how would you
recommend they get started? Maybe if 2018 was just
going to be a simple year, what would your
advice be if they're feeling overwhelmed by all
the different places they could put their money? J.L. COLLINS: Well, I
think if you're really starting from ground
zero and you really do not have any base
of knowledge on this-- and that's not a bad thing. That can be an advantage,
because at least it means you don't have bad knowledge. And there's a lot of bad
information out there. So if you're at that ground zero
level, don't feel bad about it. That's an advantage. There's nothing you
have to unlearn. At the risk of touting my
own book and my own blog, I would go there and do
a little bit of reading and do a little bit of learning. So one thing in
the way you phrased the question that people
need to be clear about-- and this is something
that I come across a lot. They'll say, well, I want
to invest in my 401(k), or I want to invest in my IRA,
or I want to invest in VTSAX. Well, you're
conflating investments with what I come
to call buckets. So a 401(k) is
not an investment. An IRA is not an investment. A TSP plan is not an investment. Those are buckets. In those buckets, you
hold your investments. Investments are things like
mutual funds and stocks and bonds. So those are the
investments that you choose to put in your bucket. So if you have a 401(k),
as you do at Google-- and I have no idea what
your 401(k) looks like, but you will have a list of
selections of investments you can put in that 401(k) bucket. If my approach
resonates with you, and you believe in broad-based
index funds are something you want to go with, you
can go down that list and maybe find the specific
funds I'm talking about. But you will certainly
probably find something that is a
broad-based index fund. The easiest way to
do that, by the way, is to find the column that
shows the expense ratio. And you should have that. You run your finger
down that, and when you find the very
lowest expense ratios, you will have found
the index funds. And focus on those, and
take a look at them. RACHEL SMITH: And why do
you think some people choose to manage their own investments,
whereas others outsource it to someone else? J.L. COLLINS: Well, I think
the people who outsource it to someone else
have been convinced that this is just too complex
for their pretty little head. And the vast majority of
things on that banquet table we talked about are too complex
for anybody's pretty little head. In 2007, 2008, 2009 when
the economy cratered, Wall Street was selling
products they didn't understand. So if this stuff
looks complex to you, it's because this stuff is
complex, and in some cases, intentionally complex. But we don't care
about that, because we don't need any of that. And once you understand that you
don't need that complex stuff, then doing it yourself
becomes much more attainable, even if you don't have any
interest in financial stuff like, frankly, my daughter. She has better things to
do with her life than fool around with this financial
stuff that intrigues her dad, and that's great. People have bridges to build
and ways to make the world work. The beauty of this is that
if you get a couple of things right financially,
you can profoundly change your financial life
without having to dwell on it. And you can get on
with doing things that are more important
to you and maybe more important to the world. RACHEL SMITH: And what do
you think are two to three of the biggest mistakes
people can make when investing or managing their money? J.L. COLLINS: Well, I think
two come to mind immediately. One is thinking that you
can pick individual stocks, and by extension, that
you can pick people who can pick individual
stocks-- that is, people who run actively
managed mutual funds. One of the comments that
makes my skin crawl is when I hear people say
something like, well, Warren Buffett
became a billionaire picking individual stocks. I'll just do what Warren did. As if. As if. There is a reason that
Warren Buffett is famous, because Warren
Buffett has managed to do something that
is extraordinarily difficult to do. The ability to do it is
extraordinarily rare. And the hubris to think, oh,
I'll just go and do what Warren has done is, to me, stunning. It's just absolutely stunning. And the research indicates
that while Warren has done it, as we talked about, you go
out 30 years, and less than 1% of people trying to do
it who have survived that long have accomplished it. And I bring this one
up first, because this was my own stumbling block. I just kept believing
that I could pick people who
could pick stocks, and I believed that
I could pick stocks. And because every now and
again I'd get it right, and maybe I got it right more
often than I got it wrong, that feeds into that belief. And that's the
thing that made me reluctant to pick up indexing. But the truth is that the
few times I got it wrong dragged down my performance-- and this is what happens to
the vast majority of people trying to do it-- to where I would have been far
better off with the index-- far better off. So trying to pick individual
stocks and managers is number one, maybe-- not necessarily in order. The second thing is
trying to time the market. And you can't turn
on the financial news or open up a
financial periodical without finding somebody
who's telling you definitively where the stock
market is going next. Nobody knows. If you could accurately do
that with any consistency, you'd be far richer than Warren
Buffett and far more lionized. It would be magic dust. Nobody can tell you where
the market is going. You just can't predict
the market, and trying to is a fool's game. So Fidelity Investments did
a little piece of research I think about a year ago,
a year and a half ago, and they were curious as
to what group of investors in their funds did best. Because the research
indicates that the people who invest in a mutual
fund under-perform the performance of that fund. He said, well, how
is that possible? If they're investing
in the fund, their performance
should match the fund. The reason they under-perform
is they try to dance in and out. They tried to time the market. So when Fidelity
did this research, they determined that
one group of investors did significantly better
than any other group who own their funds-- and that was dead people. The dead people outperformed. Now, can you guess why? Because they didn't tinker
with their investment. The second best
performing group were people who forgot that
they owned the fund. So you can't time the
market, and especially when the market has been on
as long a bull run as it has. The media is filled
with people telling you that they know what
it's going to do next. At some point, the
market will dive, because the market is volatile. That's what markets do. So if you invest in the market,
you have to expect that. You have to expect
the volatility. You have to be willing
to ride with it. But I don't know when
it's going to do that. It could be happening as we're
sitting in this room together today. I haven't looked at the market. It might be 10 years from now. I have no idea, and
nobody else knows. The difference is I'm
willing to say I don't know. RACHEL SMITH: So
for someone who may be interested in investing--
maybe when they go home today. They have some cash they
want to start investing. And they say, well, the market's
the highest it's ever been. I'm going to wait for it to dip. What advice would you
give to those folks who are waiting for the next step? J.L. COLLINS: If we went
back to March of 2009, which was when the market
bottomed and its collapse. Almost every month
since then, you could have said the same thing. I wrote a post
in, I want to say, 2014 responding to a
reader who was asking that exact same question. The S&P 500 was
1,600 and change, and this reader was saying,
how can I possibly reinvest? How can I possibly invest? Nothing would go up for
the last five years. And here it is at 1,600,
and it bottomed out at I want to say
600 and something. And where are we today? Now, I didn't know
that at the time, because I didn't know where
the market was going to go. But you just don't know. You can't predict the market. And by the way, it's become
fashionable to suggest the P/E ratios or
Shiller P/E ratios give some insight into this. In that post-- it's called
"Investing in a raging bull," it's in the stock series-- I just put a link to
a post I came across-- very well done--
where the guy analyzes where the various P/E ratios
were at the beginning of drops. And there's no predictive
correlation there to be had, so you just can't know. I also have a post called
"Why I don't like dollar cost averaging." And in summary,
dollar cost averaging is the idea of putting
in a little bit of money at a time over a period of time. The problem with that is that
unless the market conveniently goes down while
you're doing it, you will have been giving up gains
rather than avoiding losses. And the thing that
really bothers me about it is that at the end
of your investment period where you have finally deployed
all of your money, who's to say the next
day isn't the day the market takes its big plunge? So you have $120,000,
you want to deploy. and you say, I'm going to do
it over the next 12 months. And I'm going to put
$10,000 a month in, and I'm going to
avoid that risk. You're not avoiding
the risk, you're just delaying the risk until
you put that final $10,000 in. Now, if you get lucky
and the market plunges, you'll pat yourself on the back. But understand that's only
luck, because nobody knows where the market is going. There's a saying that the
best time to have invested was yesterday, and the
second best time is today. RACHEL SMITH:
That's great advice J.L. COLLINS: Time in the
market is more powerful than to time the market. RACHEL SMITH: Time
in the market is more powerful than trying
to time the market. J.L. COLLINS: Well said. RACHEL SMITH: I like that. So we have one more
question for Jim, but for folks who
have live questions, feel free to line up at the mic. We also have a Dory at
go slash Jim dash Dory. So my last question before we
turn it over to live questions is, there may be
folks in this room who have a New Year's
resolution to get their financial house in order. And they may be one
of the folks who have a lot of cash in
checking or savings, or they just are so
overwhelmed by this stuff that they don't even
know where to begin. So what would you say are
just the key takeaways they should focus on when
they leave this room? J.L. COLLINS: Well, again,
I would encourage anybody in that position-- if you're
sitting on that much cash, and assuming that
that amount of cash represents a large
part of your net worth, because money is relative. But if you're sitting on
$100,000 as an example, and that is a large
part of your net worth, that indicates that you're
not comfortable investing. And that's fine. So the first thing you should
do is educate yourself, and you can start with
my blog or my book. And see if that resonates,
and go from there. If you find it doesn't
resonate, then there are a lot of other
sources out there, but educate yourself first. And some of the posts
that I referenced are in the stock series. You can read about
investing in a raging bull. You can read about
dollar cost averaging. But once you decide
to invest in stocks, you have to accept the fact
that the market is volatile. At some point, the
market will go down. Now, whether it goes
down 10% and continues going up 20%, who knows. Nobody knows. But the market-- you can
count on it being volatile. And at some point,
it will go down, and you have to come
to terms with that. And you have to be absolutely
sure that when that happens-- not if, but when-- you don't panic. Because the only way
you lose is if you panic and sell at the bottom. Now, trust me when I
tell you, because I've lived through a few of them. When the market is taking
one of its dives, it's ugly. It's painful. It's scary. It's easy to sit here
now and say, well, I'll stay the course. But it's not so easy to
do it when it's happening. So the first thing
you need to resolve it seems to me in your own
mind, in your own heart, in your own gut, is
that when that happens, that selling is not an option. It's just simply not an option. Now, in my world,
I divide the times in our life between wealth
accumulation and wealth preservation stages. In a more traditional
point in time, that might have been when
you're young and you're working, that's your wealth
building stage. And then you get to
60 or 65, and you retire, wealth preservation. These days, people
step in and out of careers on a
routine basis, so you will go from wealth
preservation to wealth building and back several times. I know I did in my career. When you're doing that,
there are two ways you can mitigate the
volatility of the market and actually use it
to your advantage. When you are in the
wealth building stage, you have earned income. And if you're aiming to be
financially independent, a large portion of
that income is being diverted into investments. So that means on
a regular basis, you are putting substantial
amounts of your income into the market. That, by extension, means
when the market drops, you're getting to
buy things on sale. Now, you're not going
to try to time this, because we know
we can't do that. But what it does mean is
that when the market drops, you should celebrate. Because, oh, I'm getting to buy,
when I put that extra $1,000 or $10,000 or whatever
it is in each month, I'm getting more
shares in my VTSAX than I would have
gotten otherwise. The volatility works to your
advantage in that fashion. So you sleep easily at
night, because you don't care what Mr. Market's going to do. Now, when you move to the
wealth preservation stage, you no longer have that income
stream to smooth the ride. And that, in my world,
is when you add bonds, and bonds become like
ballast in your sailing ship. Where your flow of
income was before, now you're going to replace
that with the ballast of bonds. And that means that
when the market plunges, the stocks plunge,
and you reallocate to stay at whatever
allocation you've chosen, you'll be selling bonds,
which have gone up as a percentage
of your portfolio. Let's say, as I do at
the moment, you have 30% bonds, 70% stocks. When stocks plummet,
that percentage of bonds is going to go up. You sell some of those bonds,
and you're buying those stocks at lower prices, just
like your cash flow was allowing you to do it before. When stocks go back up again
and suddenly that percentage of stocks start to outweigh
where you want it to be-- it gets above 70%-- you start selling some of those
off to replenish your bonds. With those two
strategies, you no longer have to care whether the
market is going up or down, because you know that over time
the market is going to go up. And you've eliminated the
concerns with volatility. So I would embrace
those two concepts-- understand that you don't
ever sell in a panic just because it went down. That is simply not an option
that you will ever consider. And then depending on
which stage you're in, either use bonds or use cash
flow to smooth the ride. RACHEL SMITH: All right. We're ready to go to
some live questions. AUDIENCE: Thank you for coming. So I just had two
questions about the future. So number one-- [LAUGHTER] J.L. COLLINS: You are
addressing the wrong guest. AUDIENCE: I'll try anyway. So earlier in the talk,
you mentioned a very simple sentence-- what do you do with
your money, put it in VTSAX or a similar fund. So that one sentence--
it seems like you can do that in a matter of a
few clicks as an individual. So my question is about the
financial advisor system-- the kind of larger system,
where you're calling someone on the phone and
having them essentially do the exact same thing. My question is, how do you
see that changing as the world becomes more
financially educated? And then as a corollary to
that, the broader system-- if everyone kind of buys
into this indexing idea, are there any systemic
risks to the entire world investing in an index? J.L. COLLINS: OK. So with financial advisors-- I think in fairness
to financial advisors, they can be useful
in a wide range of subjects other than
making your investment choices for you. But one of the
chapters in my book and one of the posts
in the stock series is "Why I don't like
investment advisors." Because if you embrace the
simplicity that I suggest, then-- from at least an
investment point of view, as you well point out-- why would you need an
advisor to do what you can do in a handful of clicks? And when I gave my
talk at Chautauqua when I was preparing
that talk for last year, I took a little
different approach than I had taken before. And I was thinking about
the content of my book and the content of
my blog, and I'm trying to boil it down into
one line or one phrase. And really, what
I came up with is my advice is, buy VTSAX,
buy as much as you can, buy it whenever you can,
and hold it forever. And it's really that simple. And as you say, it's a matter
of a handful of clicks. The second question--
and this is one that's in the financial
community a fair amount-- is, well, what if everybody
embraces indexing? What's that going
to do to markets? And the problem
that's suggested is that indexing simply buys every
stock, where stock pickers-- whether they're individuals
or fund managers-- they're the ones who are
trying to evaluate companies and thereby creating a
trading mechanism that looks at some sort of
objective parameters and comes up with the values. And is there a danger to
that going away as everybody embraces indexing? I'm not concerned about it. I don't know if there's
a danger or not, because it's hypothetical. I'm not concerned
about it, though, because indexing at
the moment accounts for 20%, 25% percent
of the market. It is growing. More people are
embracing the idea. But I think if it continues to
grow, what I think will happen is as that sliver
of active management becomes narrower and more
and more people are indexing, the opportunity to actually
outperform the index will start to increase. And as that happens, you'll have
some of those active managers posting success stories,
and that will begin to tilt it the other direction. And I think the other reason
I'm not concerned about indexing taking over the world is
because-- as I mentioned earlier in answering
one of your questions-- it is counter-intuitive
that it is so powerful. It's part of human
nature to want to think that you can outperform. It's part of human nature to
want to best the benchmark. I still have the disease. Every now and again, I'm
still trying to pick stocks. So I think that
aspect of human nature is also going to keep
indexing from ever taking over the world. Does that help at all? AUDIENCE: Yes, thank you. J.L. COLLINS: My pleasure. Thank you. AUDIENCE: Hey, J.L.,
thanks for coming today. J.L. COLLINS: Thank
you for having me. AUDIENCE: My dad and I go back
and forth on this all the time. But do you see any
advantage to trying to diversify away
from the S&P 500 and think about either
global markets, or bonds, or commodities? J.L. COLLINS: Well,
bonds, as I mentioned, I think you add bonds depending
on what point in your life you are as ballast for
your investment ship. And other than that, I
don't see a role for bonds. What's interesting to
me about that question is the S&P 500, as
the name suggests, owns basically the 500
largest American companies. VTSAX, which is a total stock
market index fund, owns-- and it varies-- about
3,600 companies. When I first started
investing and it was before such things
existed or they were just coming on stream, the idea
of being diversified was-- because the vast
majority of people were picking individual stocks. They had to, because
that was available. There were some mutual
funds out there. But the advice given
to individual investors then was, you know, you want
to pick seven, eight, nine, maybe 10 industries. And inside those
industries, you want to pick two or three companies. And then you have a
diversified portfolio, because you really can't
physically and mentally follow more than 20, 25, maybe
the outside 30 companies. And that was considered to be
a well diversified portfolio. So when somebody
says to me, do I need to diversify
beyond 500 companies, I think you're there. I think you're there. Now, the international
aspect of it-- I'm a little at odds with
the rest of the world or most of the
rest of the world. The advice that
most people give is that in addition to buying
the S&P 500 or VTSAX, which are US companies, you need
to buy funds that can put you into the rest of the
world internationally from other countries. Vanguard itself
gives that advice. I don't buy it,
at least not yet. The US is still very dominant
in the world economy. It will continue to be dominant
for the foreseeable future. But more importantly,
those companies in the index in the S&P 500-- especially in the top
100 of those companies, Google as an example-- are international
companies by definition. So if you're investing
in the S&P 500-- and, of course, the S&P
500 is 80% of VTSAX-- you, by definition, are
invested in the world. AUDIENCE: All right, well, you
just proved my dad right, so. RACHEL SMITH: Before we
take our next live question, I want to go to the top
voted question on the Dory. So the question is from
Stephanie here in Chicago. She said, a lot of Googlers
receive a significant portion of compensation in Google stock. Oftentimes, there
are strong camps who never sell a share
or those who sell it all and diversify immediately. What are your thoughts on
holding the Google shares, since we're all
extremely invested in the success of Google? J.L. COLLINS: Well, that's a
politically loaded question. [LAUGHTER] Somehow, I think I
should say, hold Google. But that's actually
not my opinion, and that has nothing to do
with, by the way, Google stock or what I see is the
future of Google. The problem I have is in
looking at the question-- when she says we're
all extremely invested in the success of Google,
that's a great thing, but that's also an
emotional thing. And I think you need to
separate your emotions from your investing. So you all want to
see Google go forward and succeed and prosper. It is your career. It writes your paychecks. And therein lies the problem,
because when you are also invested in Google, you have
more and more eggs in that one basket. I don't know what the
future of Google is, and nobody really does. Everybody in this room
presumably in the organization is striving to make that future
wonderful and profitable going on indefinitely-- and have
done a wonderful job so far. But the world is
filled with people who are trying to eat your lunch. I think back to General Motors. So when I was a kid in the
1960s, General Motors-- who has kind of had
a rough go of it in most of your lifetimes-- in the 1960s, the
federal government was on the verge of
breaking up General Motors, because nobody else
could compete with them. General Motors was so dominant
that the government was concerned that no
other car company would be able to compete and
they would have to step in. And they were
specifically talking about splitting off the
Chevrolet division, which was just huge and dominant. Well, of course, history
tells us two things. It tells us, one, the
government chose not to do that. And two, that they
didn't need to worry, because the world was filled
with other companies waiting to eat General Motors' lunch
the moment they slipped up-- or simply the moment the
competitor figured out a better way to do it. So you have to be very careful
in putting all of your eggs into the same basket
where you work. Going back to the question
the gentleman asked earlier about the S&P 500, I would
rather own the S&P 500-- or at least have the bulk of
my net worth in the S&P 500-- because now I don't have to
guess who's going to win. Because the losers fall off, and
the winners go on to prosper. One of the beautiful
things about the index is what I call self-cleansing. And by that, what I
mean is that if you look at any specific
company in that index, you can only lose
100% of that company. But any other company
in that index-- and Google is a
wonderful example of this over the
last few decades-- can grow exponentially. There is almost no limit
to how far it can grow. So that's kind of a
winning combination. The losers fall off, and they
don't actually go to 100% before they get delisted. But the losers drift away,
and you are continually getting new blood added to
it as new companies come up. And you get the benefit
from those who succeed, and all those
companies are filled with people who are
working hard to make sure that their company succeeds. And as an investor, I
don't have to figure out who the winner is going to
be, because I own them all. RACHEL SMITH: We have time
for one more question. AUDIENCE: So I was going to ask
two, but I think they're quick. The retirement-date
funds-- thoughts on those target retirement-date funds? So automatically adjusting
allocations as you're closer to retirement-- thoughts on that? Or do you think you should
just do allocation yourself through the various bonds and
Vanguard funds on your own? And then the second one was
just really about in what scenarios would you
find it helpful to use a financial advisor. I find doing it on your own
is great, but at some point, you want some kind
of reassurance you're doing it well-- not for investment banking,
but you have to go to someone to get insurance, et cetera. J.L. COLLINS: OK, so a
target retirement fund, just to kind of quickly
explain what that is. There are mutual
funds out there-- Vanguard has them-- which are
called target-date retirement funds or target
retirement funds. And the idea is that it's what's
called a fund of funds, which means it is a mutual
fund that holds a bunch of other
funds inside it, usually five or six
different funds. And with a target
retirement fund, you pick a retirement
date, and you buy the fund. And as the gentleman
just indicated, you can hold it forever. And automatically, the closer
you get to that retirement date, the more conservative the
fund allocation will become-- that is to say, typically
the more bonds they will add. So the idea is you never have
to adjust your allocation as you get to it. Now, so some people
say, well, gee, I might want to be more
aggressive or less aggressive than the retirement fund. Well, you can adjust that. If you want to be
more aggressive, just pick one with
a retirement date that's actually further out
than your own anticipated retirement. If you want to be
more conservative, you can just bring
that retirement date in closer than you were
actually planning to retire. And the idea is that you never
have to do anything again. It is not a bad approach. If you really want to invest in
a way that is completely hands off where you really never
have to think about it, this is not a bad way to go. And in fact, I have a post
on this in the stock series, and I think it's a
chapter in the book. I'm not sure if I put
it in the book or not. But there is a post
in the stock series where I talk about these things. It's not a bad way to go. What I suggest to
people is that if you can read through my
stock series and you're comfortable with what you
read, or you read my blog-- or my book, rather-- and you're
comfortable with what you read, it is less expensive to simply
do the allocation yourself. And it's not very hard. It doesn't take much time. And that's the way I
would encourage you to go. On the other hand, if you
read through the stock series or you start reading
through it and you say, you know what, I just
really don't want to. This is just not my thing-- and there are topics,
by the way, in my life that I would have
that reaction to-- then just skip down to the post
about target retirement funds and you can be done. It won't be a bad thing to do. And the second thing, real
quickly, in terms of financial advisors-- again, I don't
think you need them. If you follow an
approach like mine, which is simple investing,
you don't need them for that. But there are other aspects
where they can be useful. The problem with
financial advisors is while there are good ones,
there are a lot who are not. And they're not for
a couple of reasons. One is simply they're
not that competent. But the other-- and a
little more insidious-- is that their interests
are not necessarily aligned with what's best for you. So if you read my post on why I
don't like investment advisors, one of the conclusions
I come to is by the time you know enough
to choose an investment advisor wisely, had you invested
that time learning it yourself, you would know enough
to do it on your own. AUDIENCE: Thank you. J.L. COLLINS: Thank you. RACHEL SMITH: We're out of time. Thanks for coming
to Google Chicago. It's been a pleasure having you. J.L. COLLINS: It's been
a pleasure being here. Thank you. [APPLAUSE]
