By writing a series of blog posts about personal finance and stock market investing intended for his daughter, JL Collins (somewhat by accident) reached an international audience of millions. Now, in the world of financial independence and early retirement (FIRE), few authors are as well-respected as he is.

Recently, we had the unique opportunity to interview JL Collins ourselves and exchange thoughts on lifestyle design, negotiating extended travel with employers, and how to invest money simply and effectively over the course of a lifetime (as recommended in his book, The Simple Path to Wealth). He’s a super chill guy who’s abnormally good at making complicated financial topics easy to understand.

You can purchase a new copy of The Simple Path to Wealth on Amazon. With a little luck, you can sometimes find a used paperback on eBay for less money.

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Interview Topics:

  1. Foundations of Financial Independence and “FU Money” (00:00:01)
  2. Negotiating Travel Sabbaticals and Work Flexibility (00:16:45)
  3. Investing and the Stock Market (00:24:52)
  4. Mortgages vs. Paying Cash For a House, and the Concept of Risk (00:57:04)
  5. Final Words of Advice (01:12:42)

This interview was recorded on July 17, 2020. A complete transcript of the interview can be found below, including a ton of relevant links and images you should definitely check out. Alternatively, you can download an audio-only podcast version (21 MB, MP3) of the interview for offline listening.

Update, August 2022: Check out our newest interview with JL Collins, in which we discuss ways of beating the performance of index funds.

Foundations of Financial Independence and “FU Money”

Lauren: Hey, we’re Lauren and Steven from Trip Of A Lifestyle, a blog about getting more out of your money and more out of life. We’re super excited to welcome JL Collins today.

Steven: JL is the author of the famous stock series, which is on his blog at JLCollinsNH.com, and he’s also written a book called The Simple Path to Wealth, which is a really, really cool book. And I read it as soon as it came out in 2016 in its entirety, and I highly recommend it.

Lauren: So how are you doing today?

JL Collins: I’m doing good. Thank you for asking and thank you for having me on.

Lauren: So, a lot of people probably might know who you are, but we have a lot of listeners who might be outside of the financial independence community. Would you mind just giving us a quick overview of your philosophy and The Simple Path to Wealth?

JL Collins: So, as you’ve indicated, my name is JL Collins, and I started a blog, which is JLCollinsNH.com, back in 2011. And the reason it has such a boring, pedestrian name is because I never dreamed I would have a blog audience. It was simply a matter of archiving information for my daughter, who was then in college — things that I wanted her to know, that she wasn’t quite ready to hear yet. And that blog has grown from that humble beginning into what it is today, which is to say, an international audience of people in what’s become known as the FIRE community: financial independence/retire early.

Much to my amazement, when I started the blog, I had no idea there was such a thing. In fact, I’m not sure that there was that acronym at the time. It was a young and growing thing. I had no idea that people were doing financial blogs. I joked that the first blog post I ever read was the first one I wrote. But the basic philosophy is to spend less than you earn. You save the difference, and you invest it, and then ultimately, that money earns money and begins to provide for you. And you get to a certain point that’s called financial independence, where your money is making enough money that you no longer have to trade your labor for money.

Now, that doesn’t mean you have to stop working; you can do whatever you want. It simply increases your options. I also like to make the point that you don’t have to wait till you get that magic FI number where you never have to work again. The moment you start, every step of the way, every extra dollar makes you that much stronger, makes you that much more independent, makes you that much freer. And it’s the journey that counts.

Steven: That’s something we always try to tell people — it’s not like you hit some magic number and then suddenly you’re free, and the day before you were not free. Saving money should make you feel a little bit better every single day that you do it.

JL Collins: Yeah. There is a magic number, the FI number, and there’s formulas that get you there. It’s 25 times your annual spend, or whatever lump sum you have, 4% of that, you can spend annually and expect your portfolio (assuming your portfolio is structured correctly) to support you.

But the point is well taken, that between zero and that number is not it’s not nothing. Every step of the way makes you a little stronger. I referred to that money in the beginning as “FU money,” because it allows you to be bolder in your choices, and that could be a lot less than the money it takes to never work again. But it’s enough money, maybe, that you can leave a job that doesn’t work out and maybe take a little sabbatical and rethink where you want to go or start something different. And then ultimately you do get to the magic number. And then most people go beyond that. And most people who have the drive and ambition to achieve that don’t sit on a beach after that; they wind up doing other cool things.

Steven: It’s funny you mention sitting on a beach because when when we first started to experience the the essence of the “FU money,” as you put it, we had we had just recently gotten married, and we took six months and went and lived in Hawaii, and sort of worked like just barely enough to scrape by and pay the bills, part-time.

Lauren: Not draw down down our portfolio.

Steven: Yeah. And, you know, we kind of didn’t add anything to our pile, but we felt completely free to make that decision for six months, and then we knew we’d get back to work after that.

Photo of Waialae Beach Park in Hawaii
Waialae Beach Park, Hawaii.

Lauren: So we were kind of on a beach, haha.

JL Collins: Well, that’s FU money in action, right?

Steven: Exactly.

Lauren: So, you know, we’ve been talking about investing money. But before you invest, you have to accumulate it in the first place. So we’d love to hear maybe some personal anecdotes or tips for how to get to that 50% savings rate, or a savings rate that allows you that quick accumulation to invest.

JL Collins: So, you know Lauren, when we were talking before we began recording this, you made a very astute comment that you had never let your lifestyle inflate, and so you never had to pull back from that inflated lifestyle. And I’m fortunate to have been in the same situation, even though when I was young, there was no Internet, let alone a concept of FI. But I knew that money was power. And I knew that invested money was freedom. And I wanted to have that, even though I didn’t really have a frame of reference for it. And the easiest thing to do is, the moment you begin your adult life and your working, is not to let that lifestyle inflation get a hold, and instead say, you know what, I am going to save a certain portion of my income, whatever that income is, because that’s going to buy the most important thing of all, which is my freedom.

In my case, I just decided, pretty randomly, with no guidance, I was going to save 50% of my income. And when you start out, when a lot of people hear that number, they say, “that’s impossible, you can’t save 50%.” But when you start out, it’s not impossible! The first professional job I had paid me $10,000 a year. That gives you an idea of how long ago that was. And I just said, you know what, I’m going to live on $5,000 a year, because I could have gotten a job that only paid $5,000! So it’s perfectly doable.

Because I didn’t live on $10,000, I didn’t miss that lifestyle. And then of course, as my income increased, I let my lifestyle increase within that 50% range. So whenever I hit $20,000 a few years after that, well, now I’m living on 10 and I’m saving 10. And so both things snowball. But your freedom always comes first.

I think anybody listening to this who is not on the FI path, and is maybe hearing this for the first time or is considering it…That’s the fundamental question you have to ask: What’s the most valuable thing you can spend your money on? And you guys can’t answer that for anybody else. I can’t answer that for anybody else. Every individual has to answer that for themselves. But the important thing is that most people in our culture aren’t taught that it’s even a question to look at. And for me, it was always the most important thing I could buy was freedom. Freedom to spend the time — my time — the way I wanted to. Now, maybe this isn’t the most important thing for some of our listeners, and that’s fine. You can choose to live your life any way you want. But at least you know that it’s an option, and a question that you can ask. And then, of course, if it is important to you, well, just like buying anything that’s important to you, it’s not hard to set aside the money to acquire it.

Steven: I think you’re definitely right, and it’s really important to bring up that freedom is something you can buy. And I think not a lot of people even consider that as an option for something that money can purchase. Like, you look around, and you look at people who make $100,000 a year and people who make $50,000 a year, and both of them retire at age 65 or 70 or something like that. And so it doesn’t even occur to you that like, yeah, you can actually purchase those years back if you just don’t spend that excess money that you end up making. Like if you score a higher income or whatever.

Funny you mention the whole 50% thing and how, you know, that number — some people see that as unreasonably high — ridiculous! And other people within the FIRE community are looking at that as like, “Oh, 50%? That’s the bare minimum you could possibly do for an early retirement.”

It’s interesting to hear you say that you targeted 50%, and then you did actually allow your lifestyle to inflate along with your income, as long as your savings did as well (that’s kind of what I’m hearing from you). We always took kind of a different view of that. We basically said, hey, we can live on X amount and be really happy doing it. So as we make more money, our savings rate just goes up with that. In other words, we added almost all of that additional money onto the investing side. And so I guess that allowed us to go a little faster. But at the same time, we kind of traded some of that time too, to take some big breaks for travel and stuff like that as well.

JL Collins: So, I think what you did is extraordinarily powerful, and I applaud that. I think it’s a great thing. Understand that when I was doing this, I had no guidance. I mean, there were no blogs. There was no Internet. There were no podcasts. I was making this up out of whole cloth. I had no idea what I was doing, actually. And there was nobody in my life who was doing anything similar — who thought the same way that I did. So I was kind of wandering in the wilderness, and had I had access to the kind of information you guys have access to, I might well have done the very same thing that you did.

You know, I started out living on 5 grand a year. I’m pretty comfortable doing that. But I had no concept of financial independence. I wasn’t aiming toward that number. That was not a goal because I didn’t have any awareness of the concept. And in fact, amusingly, I tell people that when I hit financial independence, and I realized it, I was a little stunned. I wasn’t trying to get there. And embarrassingly, I realized something cool had happened, but the significance of it didn’t sink in. The significance being that  this meant I never had to work again. It pays to have information.

Steven: That’s true. The Internet has made all of this way better. I don’t know where we’d be without all the information. I mean, I’ve spent countless hours just researching stuff on forums and blogs and all this stuff, especially when we were a lot younger, like right out of college. Blogs like yours — that’s that’s where our information came from.

Lauren: And now there’s more of a community too; it’s really helpful for people who are getting started. You mentioned it felt like you’re wandering in the wilderness alone. It’s difficult when you’re doing something that is so different from the normal life — the normal track — that, you know, it can feel a little isolating and feel a little different and even difficult because of that. But having a community where it’s normalized can make it easier on you, too.

Steven: So you know, for a lot of people, I think listening and thinking about this idea of working toward financial independence, I think one of the major hangups is cutting expenses and finding ways to make more money. So obviously, you’ve got your big stuff: You’ve got vehicles. If you could share one car between two people or drive an older vehicle…Or housing, you can live in a smaller place than you think you want, and it turns out to be okay! Or you live in a lower cost-of-living area. Stuff like that. People know those big things.

We’ve always, along the way, for whatever reason, been attracted to very strange ways of either cutting our expenses or making a little extra money on the side. So like, for example, obviously we’ve done credit card churning — where you sign up for a whole bunch of credit cards and just collect the sign-up bonuses and then cancel them. So like free money, basically. We’ve done weird stuff like withdrawing tons and tons of half dollars from the bank because sometimes they contain silver in them (if you get an old enough half dollar). So, quickly search through the rolls, pull out all the silver, and then redeposit the rest. We were making like, I don’t know, many years ago we were making like 30 or 40 bucks an hour just sifting through half dollars.

JL Collins: I’m kind of surprised that there are enough silver coins still in circulation to make that profitable.

Steven: So I think part of the magic on that was that nobody uses half dollars. So all they do is sit at the bank. So you get a little bit more lifetime on them. They kind of sit around longer.

Lauren: They might be in short supply now!

JL Collins: I was gonna say, you were about to give me my new hobby!

Steven: Yeah, try it out! Just go to the bank and tell them you want to withdraw $5,000 in half dollars, and see the look on their face. But they will do it for you, which I thought was pretty unbelievable.

But yeah. One of the recent things we’ve done that’s also ridiculous is…We live in sort of like a condo community. So we have, like, shared trash, like dumpsters. So, right next to those dumpsters — we don’t go in dumpsters; I’m not about to go there — but we have a college community around here. So people are moving out all the time; the churn is huge. So next to those dumpsters, people who can’t be bothered to sell their own stuff, they just leave perfectly good furniture. We got a mini fridge the other day that works perfectly. And we take that, we list it on Facebook Marketplace or Craigslist and just collect free money. It takes maybe 15 minutes of your time to list something, and then you get a free 50 or 100 bucks for a piece of furniture, which is crazy. But I’m curious from you, if there’s anything (maybe in your younger days) that you did, that you find is funny, or like a hack, or something unusual that you did for money or to save money.

JL Collins: Well, so, I have to confess, I don’t have any cool stories like that. When I was very young, you know, and I’m talking about like six, seven years old…In those days, pop bottles had a 2% deposit on them. And I would go by the roadside — and people tended to litter more in those days, too — and I’d collect pop bottles from the side of the road and take them to the grocery store. That’s probably as close as I can come to the kinds of stories you’re describing.

I do know people who do that though. I’ve got some good friends who have a podcast called Scavenger Life, and they make their living finding cool things and all kinds of different venues and selling them on eBay. And that’s now allowed them to buy property. And so they have a second business going, running these two Airbnbs they’ve acquired. So it can be a very, very powerful tool.

I do have one funny story to share with you along the lines of what you’re discussing, and it’s not my story — just one I heard. Somebody who was into buying used things, and bought a set of used sheets at a thrift store or something. And she told one of her friends, her friend was like, “You know, it’s fine to buy used stuff, but I cannot imagine buying used sheets, sleeping on somebody else’s used sheets!” To which this woman replied, “Have you ever stayed in a hotel?”.

Photo of us and JL Collins

Steven: That’s a good point. That’s true.

Lauren: At least you can wash ’em. You can’t really wash a couch or whatever. But, you know, sheets, you can at least wash ’em.

Steven: You also can’t be sure that hotel sheets have been washed, so maybe it’s even worse!

JL Collins: You know, you’re right. One can hope that they’ve been washed. But there are no guarantees. At least if they’re your own, you can be sure.

Negotiating Travel Sabbaticals and Work Flexibility

Lauren: So, talking about hotels here…You know, I kind of was curious if you have any favorite travel stories or experiences that you can share, since we’re talking a little bit more about you right now.

Steven: Our audience loves travel. So if you got anything you’ve ever done that was like just a super cool travel experience to share.

JL Collins: Oh, that’s hard because we’ve traveled a lot over the years. In fact, we’re nomadic now. So we do love traveling. I think in the context of this conversation, when we were talking about FU money and savings rates and what have you….When I was in my 20s and I had that first professional job (and I’d had it for a couple of years), and I had managed to accumulate the princely sum of $5,000, which was a fairly substantial amount of money in those days — certainly not enough to retire — but it was enough to travel for an extended period of time. And I wanted to do that.

So I thought long and hard about whether to quit this job, which I also liked. I mean, I liked the job I had at the time. And as I said, it took me two years to get this job. So it was not an easy thing to give up between the difficulty of getting it and the fact that I enjoyed it. But I also wanted to backpack through Europe. And I was just on the fence about whether I should quit the job and take my $5,000 and go travel for a year or two. And $5,000 would have been plenty for that in those days, especially the way I travel. Or whether I continue the job and just take the two weeks vacation that you got in those days. Standard vacation. I agonized over this.

I came across a special airfare deal that took you from Chicago, where I lived at the time, to Luxembourg and back for some ridiculously low amount of money. I don’t remember the exact amount — if you stayed for four months. So you had to leave on a certain day and you had to agree to come back exactly four months from that day. Four months was not as long as I wanted to go, but I thought, “maybe this is a compromise.”

So I went to my boss. And companies in those days were not at all flexible. And I said, “hey, you know, I want to go to Europe for four months.” And this was in the spring. I said, “Would you be willing to let me have a sabbatical and do this for four months?” He said no. And I was young, and I didn’t realize things were negotiable, so I said, “Okay.” And I left his office. It never occurred to me to negotiate.

So now I have a decision to make. You know, now I either have to leave the job, or I just stay and give up the idea of traveling. And I thought about that for about a week. And I went back into his office, and I quit. And he said, “What do you mean?” And I said, “Well, yeah, I want to go travel.” You know, I just decided. He said, “Wait a second! Don’t do anything hasty!” And so we wound up negotiating an extended time off that year. And then, I might not have realized immediately that you could negotiate things, but I’m not entirely stupid. So I said, “Well, that’s okay for this year, but how about next year? Can I get a month off every year going forward?” And they agreed to that. So that’s the power of FU money.

Steven: I would say that I am amazed and surprised by that story, but we have learned the exact same thing throughout our journey. It is crazy how negotiable your job can be if you’re in a position to negotiate.

JL Collins: I mean, and if you’re good.

Lauren: Yeah, you have to be a good employee for sure.

JL Collins: You have to be good at what you do.

Steven: That is key. Definitely.

Lauren: Yeah. We’ve been able to go into our employers and say, “We like it here. We enjoy doing the work, but we want a break. And, you know, I can keep doing work for you or not, but I’m going to leave.”

JL Collins: I think it’s never been more true than it is today. I mean, when I was young, it was a very rigid system and very little flexibility along those lines. It just wasn’t done. They just were never asked that question before. And the other problem I had is when I’d take these sabbaticals, I would have to figure out some way to fill that gap in my resume. Because it would not have been acceptable.

Now, I think if you take a year off to go travel, the next job you’re interviewing with says, “Wow, that’s so cool. Tell me about it. Tell me about what you did and where you went.” That makes you actually more attractive in a lot of cases. I think companies are much more open to this kind of thing. But you have to be bold enough to ask. There’s nothing like having FU money.

Steven: And I think just like what you said, the whole resume gap thing, it’s starting to become more of a myth than a truth. You know, companies don’t care as much that you took a little time off. It’s almost considered normal now.

JL Collins: Maybe even desirable!

Lauren: A lot of times, too, when we’ve taken time off, we’ve continued doing some small amount of work, you know, maybe 10 hours a week or so, and kind of cashflow our trips. And in doing so, there’s not actually a gap. There’s, “Well, I continue doing this work. My skills are still growing. I’m still, you know, in my field, whatever.” You don’t actually end up with a hole of any sort.

Steven: And we’ve also learned that doing 10 hours a week of work (when you’re on vacation), it’s potentially better for you psychologically than doing zero work. It’s almost not a cost to do 10 hours a week of work, but doing 40, 50 hours a week of work — that costs a lot.

Photo of Lauren at Diamond Head Crater
Lauren doing a little “remote work” at Diamond Head.

JL Collins: I think that’s a great point. The other point I would make is that, you know, with technology, you’re able to do things remotely, and that also includes staying in touch. When I remember the 80s, there were a couple of years where we went to India. Well, in those days, when I left my job (and this would be my regular vacation time that I took all at once)…When I left my job, and I was a magazine publisher at the time, and I went to India, I was completely out of touch until I got back. There was no way to reach me. There was no way for me to reach them.

So the first year I did that, interestingly, my bosses seemed more comfortable with it than my staff. They were very worried about, “Well, what happens if this comes up or that comes up?” And I said, “Look, you’re a great team. Make the best decisions you can make. If there’s truly something you don’t feel comfortable deciding, then leave it for me when I come back. And if you make a mistake, then mistakes happen. We’ll live with that.” And I remember the first time I came back, my inbox was like three feet high with things that they deferred.

Steven: And your inbox had a height to it? Haha.

JL Collins: Yeah. Right. Oh, yeah. It was physical. Yeah, absolutely. There was like real life things that looked like this in there! And then you know, the second year I came back, it was maybe maybe half that size. And by the third or fourth year, every year they got more used to it. By the third year, they were like, “Were you gone? You’re back already? You were gone, right? Do we really need you?”

Investing and the Stock Market

Steven: I know you are an expert on investing, and a very large chunk of your book is about investing money and how to manage your money. So I kind of want to ask you a few questions about just like, nitty gritty details about investing. I know that, like us, you’re very much of the opinion of, “Stick your money in index funds. Let it ride long term.” And that’s a good strategy. I’m kind of curious because I hear differing opinions on stuff like this all the time: I know that you’re not a fan of market timing, trying to buy and sell at the right times and stuff like that. Just let it ride. But I’m kind of curious how you think about, mentally, the expected return on your investment.

So like, for example, if you’re investing in a total stock market index fund, where you put some money in there, and you now own a little slice of pretty much every company in the market. If the stock market has returned 10-11% a year on average for the last hundred or two hundred years or so, do you think of your future expected return on that as, on average, 10% a year, or do you take into account,, when thinking about that, the current economic state, like right now, interest rates are super low. Does that affect your outlook at all? I mean, I know it doesn’t affect your action in investing, but does it affect your outlook?

JL Collins: No, I don’t. You’re right, it doesn’t affect my action in investing. And I really don’t pay too much attention to my outlook. I mean, if you accumulate enough money, if you get to that magic number where you can live on four percent of your investments, then you are well within the range that you can expect the stock market to return. But your point is well taken.

When I was writing my book, which I published in 2016, as you mentioned (and of course that meant I was writing in the years before), and the last year, 2015, when I was doing the final revisions…For illustrative purposes, as to the potential the stock market, I was looking at a 40-year period from 1975, which happened to be the first year I started investing. Also the year that Jack Bogle created the first index fund, which was the S&P 500 fund. And so that was the 40-year period I was looking at as my example. And when I went back and I and I looked at the return of the S&P 500 for that 40-year period, 1975 to 2015, I saw that it was just under 12% a year.

I was a little horrified, because I was not comfortable putting that in my book (12% annual returns), because I didn’t want to suggest that people should expect 12% annual returns going forward. Not because of anything that was going on at the moment or interest rates or anything like that, just because 12% is a big number. Big, big number. And I don’t think we — none of us — know what the future is.

What’s interesting is if you look at that 40-year period is, it was not some golden age. There were a lot of very difficult times in that 40-year period, including several of the worst economic moments. We had stagflation in the 70s and early 80s, right up to the ’07-’08 debacle, which is widely considered the worst in history. So it wasn’t some golden age. In fact, I did a post called, “Time Machine and the Future Return of Stocks,” where I kind of make that point. But anyway, I’m looking at this 12% number and I’m thinking, what do I do with this? Because this is the number. This is what the stock market did over this 40-year period, which was very rocky in terms of what was going on in the world with wars and everything else. And yet I’m talking such a big number. And I don’t think you should reasonably count on that going forward.

Finally, what I decided to do was use it, because it was the real number. So I used it in my illustrations. I, in two different places in bold, I make the point that I am not suggesting that you count on 12% returns going forward. Now, as it happens, in the few years since the book’s been out, you could have! But I don’t know. And I have no idea what the returns are going to be over the next 40 years. If you were thinking about that, I would think about something much more modest, 7-8%.

But again, I even as I say that, I think to myself, you know, that 12% return was over a really rough 40-year period. So it is not that unreasonable. But I’m a very conservative guy, so I don’t think I would use that in my thinking. And I don’t think it really even has to be part of your thinking as you get toward as you work toward FI. The more important thing is the four percent rule. Twenty-five times your annual spend. Those are the things — the guideposts — that I think you can best use and are most useful.

Steven: I think that’s good advice.

Lauren: We’re pretty conservative, too.

Steven: We tend to make conservative estimates and not count on things, you know, always doing well forever. The thing with the stock market especially is, the average return aside, you have to admit that it’s always rocky. It’s never like a solid ten or eleven or twelve percent a year, every year, for any period of time.

Lauren: It’s lumpy.

Steven: I mean, it’s very lumpy. And so you have to understand — you have to reconcile the fact that you could lose 30% of your portfolio in a year, and you could still average +10-12% per year over a 30-year period.

JL Collins: That’s that’s an incredibly important point. Yeah. When we sit here and talk about over 40 years of market returns, 12% a year, there was probably not a single year of those 40 where we returned 12%! You know, there were years where it returned much less, and there were years when it returned much more. It’s a wild and rocky ride. And that is maybe the most important thing for anybody listening to understand, is that if you are going to follow my advice, you need to understand that market corrections, which are defined as -10%, bear markets, which are defined as a 20% drop, crashes, which are -30%+, are to be expected. They’re normal. They’re part of the process.

It’s like, you guys are in Florida, but it’s like living in Florida and being surprised when a hurricane comes along. You should not be surprised. Now, that doesn’t mean that hurricanes aren’t scary, dangerous, damaging things. They’re very scary, dangerous and damaging things, as are plunges in the stock market. But they should not surprise you. They are a normal part of the process. And you need to come to terms with that if you’re going to live in Florida, or if you’re going to invest in the stock market.

I tell people, if you are not willing to tie yourself to the mast and understand at a gut level that when the market plunges, you are not going to sell — it is just not an option — that you are going to weather that storm. You’re going to hunker down and let that hurricane pass over. If you’re not willing to do that, then don’t follow my advice! If you panic and sell, my advice will leave you bleeding at the side of the road. It will be worse than doing nothing.

But once you understand that this is not something to be afraid of — this is a natural part of the process, and if anything, if you are working and you are devoting, say, 50% of your income to investments, and you are doing that reliably, then when the market plunges, it is an absolute gift.

Here’s an example: when the market plunged this spring, my daughter was working full time. She’s an adult. She puts in a percentage of her income every month. And I happen to notice that in April, when she put in that amount of money, it bought 19% more shares in VTSAX than the same amount of money in March. That’s because the market plunged. That’s a gift. The best thing that can happen to young people starting out in their investment career — the absolute best thing — is a major market crash. That brings all the prices down, and you’re buying on sale.

Steven: But I think the flipside to that is that you want to be buying all the time, regardless of whether you’re “getting a deal.” I think people take that sometimes to the extreme and say, “Well, the market’s on sale, so I’m gonna buy more than I usually would.” Or, “I’m going to wait to invest until the time when the market crashes.”

Lauren: Wait to invest as a big problem.

Steven: So what are your thoughts on that?

JL Collins: So I agree with you. That goes back to what you said earlier. I love the idea of timing the market. I just I’m absolutely in love with it. The only problem is it’s not possible. If it were possible, it would be an investing superpower. Now, how do I know that is not possible? Well, I know that it’s not possible because if it were, you would be 10, maybe 100 times richer than Warren Buffet and far more lionized. I mean, there would be no investing power stronger, more effective, than timing the market — if it were doable.

And certainly, some people occasionally get it right. But occasionally getting it right doesn’t cut it. You need to be able to get it right over and over and over again. And nobody, and I mean, nobody can do that. So what do you do in the face of that? Well, exactly what you were suggesting: You just keep investing.

I didn’t say to my daughter, “Don’t invest in March because you’ll be able to buy more shares in April.” I said, “Invest in March because you don’t know what April brings. Invest in April because you don’t know. Maybe May will be lower.” As it turns out, May was higher. You don’t know. You just keep putting the money in. What you do know is that those storms — those periodic storms — will come. And when they come, if you’re investing routinely, not only do you not have to be afraid of them because you know they’re normal. But you can also look at them and say, wow, this is a gift. This storm allows me to get more shares for my same amount of money.

Now, if you are putting more money in when the market goes down, the problem with that is by definition, it means you’ve been holding money back. And that is a losing strategy. Why is it a losing strategy? Well, because the market goes up more often than it goes down. In fact, the market goes up three out of four years. So for every four years, the market goes up three and will go down one. Now, it doesn’t happen on a regular basis that you can predict. This is over a long period of time. So if the market’s been up three years, it does not mean it’s going to go down the next year.

Steven: Wait you mean like a roulette wheel — when it comes up black three times in a row, I should bet red the next time, right? Haha.

JL Collins: No, but that’s that’s a great example. What it means is that red and black are going to come up exactly the same amount of times. And when you’re playing the stock market — and playing is the wrong word — when you invest in the stock market, on average, three out of four years will be up. So if you have a chunk of money you’re sitting on and you say, “Is now a good time to invest it?” Well, the odds are 75% that yes, it is, because 75% of the time, the market goes up. So if you’re a betting man, then you’re going to say, “I’m going to take 75% odds!” Is it possible that you’ll invest and it’ll be the time that it goes down? Of course it’s possible. Do you want to not invest, against that 25% odds, or do you want to take the 75% odds?

Steven: Makes sense.

JL Collins : Yeah. I would hope. Haha.

Steven: So when you say that, you know, for a young person, the best thing to do is to just consistently put money into the market every month, or every whatever interval you choose…I think to a lot of people, that sounds like dollar-cost averaging. But you also have written about the idea that you hate dollar-cost averaging. So can you explain the difference there and what you mean by that?

JL Collins: So I don’t hate dollar-cost averaging, but I don’t think it’s optimal. So you have to draw a distinction. When you are working and you’re putting in money every month on a regular basis, that is, I guess, by definition, dollar-cost averaging. And that’s the kind of dollar-cost averaging I love. I think you should do it. But you don’t have any option, because you can’t invest money you don’t have.

So using my daughter for an example, you know, she can’t invest April’s money in March. She hasn’t been paid any more money. So by definition, she has to dollar-cost average into the market. And by definition, that means that when the market plunges that 25% percent of the time, she will benefit from that. And that flow is what smooths the ride, makes the ride more tolerable.

Lauren was talking about how rocky it was a little bit earlier. The dollar-cost averaging I’m not in favor of is if you have a lump sum of money, if you are sitting on let’s say, let’s make the math easy, $120,000. And you’re afraid that, “If I put it all in today, maybe tomorrow’s the day it goes down, and the market goes down 30 percent.” And that’s terrifying. And I get that. But again, remember our odds. The market goes up more than it goes down. So the odds are that the market is going to go up from this point. Not down. 75% to 25% percent.

People say, “Well, you know, I’m still afraid. I still want a dollar-cost average.” And I’ll say, “If that’s the only way you’re comfortable getting in, then do what you have to do.” But let’s say you say, “I’m gonna take my $120,000 in $10,000 chunks over the next year — $10,000 every month — $120,000. And I just feel better about that, just in case the market drops 30% tomorrow.” You do that. Well, the only way that works out for you financially is if the market has a down year. You’ve got a 25% chance of that happening. If the market is a flat year, you will lose money because you would have been better off having your money work earlier. If the market goes up, which it does 75% of the time, every month you will be paying a little more for those shares. So your $120,000, over the twelve months, will give you fewer shares at the end of the day than if you put it all in at once. So I don’t like it.

Now here’s the really bad thing — the worst thing — about dollar cost averaging. Let’s suppose you say, “Jim, I hear all that. I get it. I just, I’m still gonna do ten thousand a month.” Well, you put that last $10,000 in. How do you know that the next day after that isn’t the day that it plunges 30 percent? You don’t know.

Steven: That’s the point that we bring up to people all the time when they have a lump sum to invest. If you dollar-cost average in, you’re going to cost yourself along the way, like you just said — three out of four years it’s up — but at the end, you’re still all in! I mean, every year thereafter, you’re taking that all-in risk. So why not go ahead and start today, right?

JL Collins: Absolutely. And it’s the same thing you could say. Let’s say you have your $120,000 invested, or however much you’ve got invested. Every day you’re taking the risk that tomorrow’s the 30% drop. And someday it will be! That’s just the price you have to pay in order to get those returns. We talked about that 40-year period from 1975 to 2015. The return — just under 12% a year — was a great return! But in order to get those returns, you had to live through the stagflation of the 70s and early 80s. You had to go through Black Monday, the single worst day (1987) in stock market history. You had to go through the tech crash. You had to go through 9/11. You had to go through ’07, ’08, ’09.

I mean, that’s the ticket for admission. But those things are normal. And even with all those terrible things, the market still delivers tremendous returns. And as long as you believe in the United States as a viable economic entity, it will continue to do that — it will always come back. Now, there are people who don’t believe that, who think that the country and civilization is about to crumble. And I don’t agree, but if you do believe that, this is not an approach you want to use.

Steven: We recently watched a show called “Doomsday Preppers,” and there’s a lot of people like that on there.

Lauren: Most of them are preparing for economic collapse. They want to like, live underground in case of an economic collapse.

JL Collins: Right. And, you know, if that’s your belief system, you’re not going to want to follow my strategy. You’re gonna be following a very, very different strategy. And people point to black swans. And all I would say is, well black swans are by definition, very rare events. That’s why they’re black swans. That’s where the name comes from. And so you have to ask yourself when you’re building your portfolio: Do you want to build your portfolio for what’s going to happen maybe 1% of the time or maybe never? Or do you want to build your portfolio for what’s going to happen 99% of the time? Now, if you really think the world’s going to end, and you want to also build a bunker with canned goods and shotguns, then, you know, I’ll probably be knocking at your door asking for refuge if you turn out to be right.

Steven: So even if you’re not a doomsday prepper, or something like that, you know, you brought up that investing in the stock market fundamentally means that you think the United States is a viable place for business to continue and for productivity to happen in the future. Right? And I think that’s interesting, and it’s probably especially interesting to people who might be listening from outside the United States and thinking, “Well, what about my country?” And people inside the United States also think, “Well, should I only be investing in the United States?” And so, I know that in your book and on your blog, you advocate for the U.S. total stock market index fund as the main stock market vehicle. And I’ve always been curious, are you against international investing, or do you just think that it’s not really necessary for diversification?

JL Collins: So, the second, I would say. I think for Americans, it’s not really necessary. Now, let me elaborate on this a little bit, because when I’m in Europe or overseas and talking, I say something very different. The United States is the only country in the world that is large enough. The economy and the stock market is large enough and represents a large enough portion of the world economy where you can get away with investing only in that country. So as Americans, we can get away with only investing in the United States.

The United States accounts for about half of the world economy. And if you’re investing in an index fund like the S&P 500 fund, or my preference, the total stock market index fund, which is about 80 percent the S&P 500, you are investing in companies — US companies — that are by definition international. So as the international economies grow — they have been, and I think they’ll continue to — even though you’re only investing in US companies, you are benefiting from that. The US is the only economy large enough where you can get away with that.

When I’m speaking internationally for those people, I say, “You ought to be in a world fund, where it’s literally buying all the economies of the world.” Now, you could, as somebody outside the United States, you could buy just the United States and be like Americans. And I don’t know, I think if I were from a different country, I would feel uncomfortable putting all my money in what would, to me, be a foreign country.

I do see a time coming — and not in the immediate future — but maybe in my daughter’s lifetime, where the United States, our portion of the economic pie will become small enough that even Americans will want to expand and go international, go into a world fund.

So to put that in context, that’s not bad news for the United States, by the way. So let’s back up. You come out of World War Two. And at the end of World War II, the United States is the only industrialized country in the world that is not in ashes. The only one. Every other industrialized country, all of Europe, large portions of of Asia, certainly Japan, are all in ashes. So the world economy coming out of World War Two is essentially United States. Probably close to 100%.

Now, as you come out of World War II, the United States, with the Marshall Plan and rebuilding Japan, plays an active role in rebuilding the rest of the world. Because that’s good for us. It’s the right thing to do. But it’s also good for us. And as those countries rebuild, the pie gets bigger. And, of course, they begin to get a piece of that pie. Their economies begin to represent a piece of that pie. And to the extent that it does, the United States goes from, let’s say, 95%, maybe to 90% and then 85%. And that’s what we’ve seen since the end of World War II. 75 years, whatever it’s been.

The percentage of the pie that the US represents has been getting progressively smaller. Not because we’re doing something wrong, because the rest of the world is growing! And now, of course, what we used to call the “third world” is coming on economically, which is great for them, but also great for us, great for all the rest of the world. So that pie is getting bigger and bigger. So the U.S. economy today is far bigger than it was at the end of World War II, even as the percentage of the pie is half of what it was back then. I see that trend continuing. I see the world getting better and better.

There’s a wonderful book called Factfulness, for people who are listening to the news all the time and thinking everything’s terrible. Things have never been better in human history than they are right now. And that book, Factfulness, looks at actual facts as to why that’s true. And part of that is, all around, the world is getting better and better. There’s less and less poverty. There’s more and more wealth. Lifespans are expanding. All that’s great stuff for the United States as well as the rest of the world. But it also means that as it gets bigger, our percentage gets smaller.

So I say to my daughter, you’re going to want to pay attention to that. And at some point, like the rest of the world, you’ll probably want to say, “I’m going to go international.” Right now, the United States is big enough and dominant enough that I think it’s the stronger bet. And that’s where I’m going to be.

Steven: For us personally, we are about 40-45% international in terms of our stock exposure. Would you tell somebody today to change that, or you think it’s kind of just like a minor issue?

JL Collins: So, with the caveat that we are looking into the future, and nobody can do that successfully, my guess is you’re probably a little ahead of the curve. And, because I’m 100% US stocks, I will probably over the next 10 years outperform you. But I could be wrong about that. I could be wrong about that for a lot of reasons. The change that I’m describing could happen faster than I think it’s going to happen, number one. Number two, the United States could stumble in a way that maybe I don’t see happening at this point. Maybe we do something stupid politically that damages our economy. So that’s possible. So who knows?

At the end of 10 years, if you and I sit down and have this conversation and compare notes, my guess is that my performance will probably be better. That’s not a guarantee. And, you know, I could see a scenario where your performance might be better. I think the more important thing is that if we’re both saving and investing aggressively and buying our freedom, we will both be successful, and we will both be ahead of the game and much further, well, I’m already free, but further along on our journey to financial freedom.

Steven: I agree that ultimately, how much you keep of your own earnings is infinitely more important than the specifics of how you invest your money. Absolutely right. We’re almost talking about minutia here, just splitting hairs.

JL Collins: I agree with that. I have a post called “Too Hot, Too Cold, Not Pure Enough,” where I talk about that because I have people who say to me, “Oh, you are much too conservative. You know, if only you were leveraging these indexes or only doing this or that, your performance would be much better. So you’re much too cold.” And then I have other people saying, “You recommend 100% in stocks. 100% in VTSAX, which is Vanguard Total Stock Market fund. Oh, that’s much too aggressive. Much too aggressive. Nobody should be 100% stocks! You know, you’re much too hot.” So anyway.

Steven: So speaking of splitting hairs, let me split one more hair with you, because the financial independence community talks tons and tons, endlessly about this, especially as new people come in. So we want to get it from you — once and for all — on record. In your book and on your blog, you recommend VTSAX, the total US stock market index fund from Vanguard. So you own a little slice of almost every US, publicly traded company when you buy that. So there is a sister fund to that. That’s an ETF version, VTI. And it basically has the same holdings, but it’s in a different format. And so, you know, a lot of people tout VTSAX, and a lot of other people say, “Well, VTI is the same thing, and the only reason why VTI isn’t talked about is because JL Collins didn’t write about it in his book!”

Photo of The Simple Path to Wealth

JL Collins: I have never seen people say that. I’ll take that as a compliment.

Steven: I’ve seen it a dozen times at least. So I want to get it straight from you. Are those two — VTI and VTSAX — virtually identical or not?

JL Collins: No, they’re not virtually identical. They are absolutely identical. They are exactly the same portfolio. I just did a post earlier this year about the difference between mutual funds and ETFs. So VTSAX is a mutual fund. VTI is an ETF — ETF standing for “exchange-traded fund.” Those two hold exactly the same portfolio. Now, there are differences between mutual funds and ETFs. There are very minor differences. For our purposes, they don’t matter. If you want to hold VTI, then hold VTI. You’re holding exactly the same portfolio. I have VTSAX.

Let me take it a step further, because I guess that’s a question I get quite a bit. That’s one of the reasons I wrote the post that I just mentioned. But the other one I get a lot as well (I usually get this in in relation to 401(k) programs — people will say to me, “You know, Jim, I really want to be in VTSAX, but in my 401(k), they don’t offer total stock market. They only offer an S&P 500. So I’m lost. What do I do?” Well, the S&P 500 fund is fine. It’s great! The S&P 500, which is the 500 largest U.S. stocks — it makes up 80% of VTSAX. If you own VTSAX, you own about 3,600 companies. As you said, virtually every publicly traded company in the US. Because it’s cap weighted, that is, it buys more of larger companies and small companies, 80% of that is in the 500 largest. So if you’re in an S&P 500 mutual fund, as supposed to VTSAX, you’ve got 80% of the same portfolio.

I prefer VTSAX slightly because I like the idea of having those smaller companies. But the truth is, if you graph the performance of the S&P 500 fund from Vanguard — I don’t remember what it’s called — and VTSAX, those lines will track almost identically. And it goes back to the conversation we had about international, Steven. And I said, you know, “Who knows? In 10 years, we’ll sit down and see who comes out on top.” The same thing is true of the S&P 500 fund and VTSAX. Ten years from now, one of them will do slightly better than the other. It could be even closer than the international.

Steven: I was hoping you’d say that. And I wanted you to put it, not in writing, but, you know, on record.

Mortgages vs. Paying Cash for a House, and the Concept of Risk

Steven: So, you spoke a little bit about risk and, like, how aggressive to be before. And you mentioned that there are levels to risk. Some people think that being 100% in the stock market in a fund like VTI or VTSAX is very, very aggressive. And then there are others who say you should be borrowing money at low interest rates to invest — to boost your returns even further. And then there are other people who are very scared of the stock market, and they’re holding a lot of bonds in their portfolio to balance that out. And they’re not leveraging at all.

For us personally, we’re not 100% stocks. And part of that is because, yes, we’re young, but we’re also kind of easing into like a semi-retirement phase of life, where we’re not so much in the accumulation phase anymore. So it feels like we need a little more safety. But interestingly enough (the timing of this call), we sold $121,000 worth of stock yesterday, of index funds — the Vanguard total U.S. and total international index funds. And we didn’t do it to time the market — don’t worry, you don’t have to yell at us or anything like that.

JL Collins: But I was so looking forward to yelling at you!

Lauren: That probably would have been better! “JL Collins yells at us.”

Steven: But the reason why we did it is because, we currently own the house we’re sitting in — this little modest condo — in full, in cash. We didn’t get a mortgage and leverage this property like we could have to keep more in the market. And we’re thinking about buying another property and moving, and maybe turning this one into a rental or something. And we wanted to have cash on hand. So we liquidated some of those positions because, you know, the stock market is not where you want to keep money that you might need tomorrow. So I guess I would just ask you, are we dumb for thinking about paying cash for a second house? Should we be taking more risk?

JL Collins: So, you covered a lot of ground there. And there are a couple things that I want to address before I answer the last question. But in brief, no, you’re not dumb to do what you did. But I want to go back a little bit, because you mentioned three scenarios.

You mentioned the person who is borrowing money to buy stocks to be very aggressive because the market always goes up. You mentioned somebody who is 100% in stocks, which is considered very aggressive on a lot of fronts. Then, you mentioned somebody who can’t tolerate stocks and was all in bonds. And I want to come in on each of those.

So, first of all, the person who is borrowing money to buy stocks is out of their bloody mind, because that’s how you go broke, alright? If you buy VTSAX or VTI or the S&P 500, unless the US fails, you will never go broke. It will always come back. But if you buy into leverage and it goes down below what you owe, then you can easily go broke. You can easily be wiped out. Leverage is a very powerful thing, but it’s powerful from both directions. And this, in fact, is one of the key things that caused the Great Depression after the market drop in 1929. So many people were leveraged in their purchase of stocks.

Then, when they got what are called “margin calls,” which is basically the brokers saying, “Hey, you know, you bought this stock borrowing 50% of the money, and it’s dropped 50%. You got to come up with more money now to cover it, or we’re going to sell it to recoup the money.” Well, people didn’t have cash to come up with. So it got sold, and that created the selling pressure that caused the market to drop as far as it did and triggered the Great Depression. So buying stock on margin — borrowing money to buy stocks — is insane, in my opinion.

Not having enough stock is also a very dangerous thing to do, because without the growth potential of stocks, things like the four percent rule don’t work if you don’t have at least 50% of your portfolio in stocks. You don’t have enough growth to support the portfolio over decades. So you have to be very careful. No matter how conservative you think you are, the further away from stocks you move, actually, long term, the greater the risk that you put in.

And then you have that middle one, it’s Goldilocks, if you will. And I remember, Kristy Shen, a friend of mine, she writes a blog called Millennial Revolution, which I highly recommend. And Kristy and I are pretty good friends. And she and I were talking one time. And research has shown that human beings are much more risk-averse than they are driven by the potential for gain. And that makes sense when you think about evolution. If you saw a bush rustling, and you ran away, well, it might have been a sabertooth tiger. And so you survived to pass your genes on. Of course, it might have been a rabbit, and you missed a meal, but all the people who assumed it was a rabbit eventually got eaten by the sabertooth tiger. So we’re hardwired to be risk-averse.

And I said to Kristy at one point, you know, I must just be different than other human beings. I must just be hardwired differently, because I don’t feel any fear of the market dropping. I don’t feel any fear of that risk. You know, it just doesn’t bother me. Now, part of that is, over the years, I’ve learned not to. I’ve been through that. And Kristy listened to me, and she said, no, JL, you’re not a special snowflake. You know, you’re hardwired just the way the rest of us are. The only difference is, JL, that you understand at a gut level that the market always comes back. And so you understand that there really is no risk.

There is volatility. The point Lauren made at the very beginning of our conversation — it’s rocky — but unless the United States fails, there is no risk. It will always come back. And that’s why I’m safe saying to my daughter, you can invest 100% in stocks as long as you stay the course, as long as you keep putting money in, and that volatility will work in your favor. Now, stocks, as I said earlier, you know, my holding period for my VTSAX is literally forever. You know, I don’t ever sell it. The only time I would sell it is, now that I’m living on the portfolio, to raise money to live on. And that’s only a tiny fraction of shares because it throws off a two percent dividend. So that covers half of what you might need at 4%. But you shouldn’t hold money in the market that you might need short-term.

So good — now, finally, we’re getting to your question about the house. If you think there’s a very realistic chance that you’re going to buy a house in the not-too-distant future, then raising the cash is probably a smart thing to do, because you don’t know what the market’s going to do. The market does take periodic plunges, and the market might continue to go up from here. You know, so far, we’re in a V-shape. The market took a steep plunge, and that’s climbed back up, but nobody knows. In spite of all the people — all the talking heads who claim to know — nobody knows what the market’s going to do next. And so the safest thing to do is to take the money out that you think you’re going to spend.

Now, if you wanted to keep it in, and you were willing to postpone the house if the market turned against you, then that might give you a better return. But no, I think you probably did the right thing. Long answer to a short question. You actually buried several questions in that.

Steven: That was a fantastic discussion. I think risk is a lot of times overlooked in the discussions on investing, especially with young people. And I do want to press you further on one thing you said: You said that borrowing to invest in the stock market is insane. And it occurs to me — and this is part of the reason why we paid cash for our first house and are thinking about doing it again — that when you take a mortgage, especially a large mortgage, when you could have sold the stock to pay for your house, you are borrowing money to invest in the stock market — or rather to keep invested in the stock market. Right? So how is that different really than a margin loan other than maybe the interest rate?

JL Collins: That’s an interesting point, philosophically. And I think you might have something there, but there are some very practical differences. And that the most immediate practical difference is that if the market plunges, you’re not going to get a margin call if you have a mortgage in your house, because it’s not your stocks that you mortgaged — it’s not your stocks that you borrowed against. Now, you could say, “Well, you know, I’ve taken on debt that I didn’t have to take on blah blah blah.” I’m not at all opposed to having a mortgage, and especially at these low interest rates, this becomes an interesting speculation.

If you look at that 40-year period that we talked about, where you’ve got 12% returns, you say, okay, I’m confident that in going forward I want to be much more conservative. So let’s say I’m going to cut that in half. Let’s say maybe I’m going to get 6% returns over the next couple of decades, which is pretty conservative. And then you say, “I can get a mortgage for –” what are mortgage rates now? Three percent?

Steven: 2.5% for 15-year and 3.5% for 30-year, I think.

JL Collins: Yeah. So first of all, I’d go with 15-year, and I’d go with 2.5%. But if you borrow money at 2.5% with a mortgage, you know, I think long-term, you’ll probably be better off keeping your stock holdings intact and taking that mortgage, because again, if the market plunges, you’re not going to get a margin call on your stock holdings.

Steven: That’s an interesting point that I didn’t really think about there. We’ve always just thought about it in terms of the swings in our net worth along the way. When you’re in a leveraged position, you know, if real estate goes down at the same time as stocks, which is common if there’s a big dip. Particularly in our lifetime with the whole 2008 crash.

Lauren: We might be a little scarred.

Steven: We were in high school, but, you know…I always think about, if real estate goes down at the same time that stocks do, you’re in a position where, it’s not that you’re gonna get a margin call and you have to pay it back, or you’re going to go bankrupt, literally…But it’s a position where your net worth could could go to zero overnight, or in the time period of a year or two maybe. And I guess that would just make me feel less free, or more obligated to work all the time and not feel like I had “FU money,” you know?

JL Collins: So now you can have a reasonable conversation about how much risk you want to take. So I said that anybody who buys stocks or mutual funds on margin, borrowing money against it — putting that up as collateral — is insane. And I think that’s true because it can wipe you out completely. Certainly the most conservative thing you can do is to not take the mortgage, too. Sell your stocks and buy the property 100%.

Now, you are giving up potential returns on the market, and as we discussed earlier, 75% of the time, the market’s going to go up. There are no guarantees in life, but 10 years from now, the market is likely to be higher than it is today. 20 years from now, if it’s not higher than it is today, something unprecedented is happening. There’s never been a 20-year period where it wasn’t higher at the end of that 20-year period. So, it seems to me that it is a pretty safe bet to take that mortgage. But it is not the most conservative thing you could do, certainly. And of course, you also have a lot of variation. You could take the maximum mortgage, or you could borrow half of the money or 40% of the money.

Steven: That makes sense to me. I thought about the idea of, well, maybe we take half a mortgage. Like you said, or $50,000 or something like that — just to get a little bit of leverage in there. But then I thought, well, logically, that would mean we have to sell our entire bond position and put it in stocks before doing that, because otherwise you’re holding debt while you also own debt. So it doesn’t really make any sense. Right? So do you agree with that logic?

JL Collins: Well, not entirely, because, you know, the reason you hold bonds — and I’m not sure that if I were your age, I would be holding bonds — but you also said you’re about to retire, and so it’s not such a matter of age as it is to whether you’re living on your portfolio or not. But, you know, I own bonds now. But I don’t own them because I want to own debt in particular. I own them as ballast against my stock holdings. When you’re working, the ballast against your stock holdings is that cashflow from your employment which you’re putting in. You’re putting in a proportion of it every month. And that’s what smooths the ride. But if you are not working any more, and that cashflow goes away, and you want something else to smooth the ride — which most people do — that’s the role, in my world, that bonds play.

Steven: My thought process was, if bonds are paying less than the mortgage is charging me interest, it can’t make any sense under any circumstances to hold them at the same time. That was sort of my logic on it, I guess.

JL Collins: Well, I mean, I wouldn’t argue with that. And so maybe you’ve answered your question. Maybe, instead of holding the bonds, you put them against what would have been the mortgage, rather than selling off your stock holdings.

Steven: That’s a good point.

JL Collins: But again, to a certain extent, there is no real wrong move here, right? I mean, you’re trying to figure out what’s optimal, and that’s great, and that’s fine. And a lot at this point, a lot of it becomes personal preference — what you’re personally comfortable with.

Final Words of Advice

Steven: I’ve got one last investing-related question for you today. And I could ask you a million, because your insights have been amazing on all this stuff. But I think for our audience in particular, you know, this question comes up all the time: “I’ve saved my first X dollars.” $10,000, let’s say, you know, a young person. “What do I do with it?” And I kind of think I know your answer, but — what’s the answer to that question?

Photo of girls reading The Simple Path to Wealth
They say you can never start investing too early.

JL Collins: Well, so, it needs a little context, but if you’re talking about $10,000 that you want to invest for the long-term, then my answer is VTSAX. And that’s always the answer. But again, the caveat is that you will never sell. You won’t panic when the market goes down. You will hold it forever. And ideally, you will add to it on a regular basis. And other than that, forget about it.

You know, investing is really very, very simple. I like it. You guys obviously like it based on the questions you’re asking. Probably the people who are listening to this like it, if they’ve listened this far, so maybe this is a point we should’ve made earlier in the program. But if you follow my approach, you don’t have to like it.

My daughter doesn’t like it, but in a way that’s a superpower. And what I mean by that is, because she doesn’t like it, all she has to do is understand are a few basic things. You buy a low-cost index fund, the S&P 500 fund, or the total stock market index fund. You hold it forever. You add to it as much as you can, whenever you can. And other than that, you forget about.

People say, “Oh, you know, you should watch the eggs in your basket.” No. The superpower is to forget about it, because the more people pay attention to this stuff, the more they get freaked out. When the market does something goofy, the more tempted they are to tinker with it, to try to boost their performance, to avoid losses. And the more you tinker with it, the worse you do.

The fact that my daughter doesn’t care is her superpower. She just keeps putting money in. She probably didn’t even notice that the market took the plunge that it took in April. It’s just not on her radar screen. You’ve got more important things to do with your life. So that’s the superpower. So that’s what I would say to the young person. But be sure that it’s $10,000 that you’re going to put away forever, and that ultimately, you’re going to live on when the time comes. And even then, you’re only going to be pulling out a tiny bit of it. A little bit at a time.

Lauren: I like that we can talk a little bit and get into those nitty gritty details, but you know, personal finance is just that — it’s personal. You can do things a couple of different ways, but there are still some basic truths — if you want the simple, most direct route to not having to deal with it. And I think a lot of people are in that boat, especially young people who should know what they’re doing before they get started. But just that, you know, there’s a lot you could delve into in the world of finance, but you can get started, and it doesn’t have to be this huge undertaking. There is a direct path to becoming rich almost automatically.

JL Collins: It is. It is. If you do it correctly, it is automatic. You know, the analogy I use is that — well, first of all, before I get into an analogy — you have to understand that the financial world makes this stuff seem very complex, and there are very complex financial products out there. And that’s by design, because the more complex it is, the higher the fees they can charge, the higher the commissions, the more they can force you into their waiting arms. “Don’t worry your pretty little head about this — we will take care of it for you.” And then charge exorbitant fees.

The analogy is, it’s like magic. Imagine you had a table loaded with all kinds of exotic foods. I mean, just everything you can possibly imagine, you know. And in one tiny corner of that table are the simple foods that your body really needs, that will really make you healthy. Simple fruits and vegetables, the basic things. And then there are all these exotic things that might taste wonderful, but give you indigestion or whatever it is. But you could put your arm on that table, and you could sweep all those things on the floor. All you need to be healthy is those simple little things in that corner. It’s the same thing with the investment world. You can put your hand on that table and sweep all those exotic things onto the floor. All you need is simple, low-cost, broad-based index funds — the S&P 500, or my preference, the total stock market index. When you have bonds later, the total bond market index — and you’re done. That’s it. And you can go about your life.

And that’s a vast majority of people. We’re the odd ones out, we three. And probably some of the people listening who stuck with us this long — we’re the ones out. We’re the aberrations. Normal people don’t want to spend their lives thinking about this. My daughter doesn’t. But if they’re smart, they realize that it’s important, because your life is so much better if you just understand a couple of simple investing things and implement them and do it — your savings rate, and low-cost index funds — your life is so much better, so much freer. But you don’t have to obsess about it. Do those couple things and then get on with it. And from that point, the less you pay attention, the better off you’ll be.

Steven: So I guess we could say that there is a “Simple Path to Wealth,” right?

JL Collins: That’d be a great title for a book!

Steven: I’d hold up my copy of your book right now to show everybody, but I loved it so much that it’s always lent out to someone.

JL Collins: I can do that for you!

Steven: Haha. Thank you so much for joining us today. We really, really appreciate your time. And it was awesome talking to you and nerding out about investing stuff that a lot of people probably don’t even care about. Haha.

Lauren: But hearing about how you still had, like, an amazing life, taking your sabbaticals, traveling so much. I mean, that’s super relevant to our audience as well.

JL Collins: Yeah. You don’t have to give up your life to do this. It’s just you learn very quickly that  money has as very little influence on your happiness. You know, you can be just as happy living on $5,000 (back in the day) as $10,000. So, yeah. It didn’t certainly didn’t get in the way of my happiness.

Steven: So JL, where can people find more about you online and read more of your stuff?

Lauren: How do you like to connect?

JL Collins: I’m not sure I do like to connect, but if people want to read more on the blog, as you mentioned kindly early, it’s JLCollinsNH.com. And then from there, I am on Facebook, I’m on Twitter and you can friend me or whatever. I don’t even know the terms. If you’re curious when I get on a rant and tweet something. And yeah. That’s it.

I would suggest, by the way, that nobody should buy the book without going to the blog first and reading a little bit of the stock series, because the book is largely the stock series. And if you read the stock series, and it doesn’t appeal to you — it doesn’t work for you — then the book’s probably not gonna work for you.

Steven: Well, I enjoyed it enough to read it twice, so I read through both.

JL Collins: Well, good. Good. I’m pleased and honored to hear it.

Steven: Well, thanks so much!


If you want to hear more from JL Collins, you can purchase a copy of The Simple Path to Wealth on Amazon, listen to the audiobook with a free trial of Audible, read the eBook on Kindle, or score a used paperback on eBay.

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