The Simple Path to Wealth, by JL Collins is a guide to financial independence and retiring early, often referred to as the “FIRE” movement. The book presents a clear and straightforward approach to investing and wealth management. Collins recommends investing heavily in low-cost index funds, particularly those tracking the S&P 500, and avoiding debt to accumulate wealth over time. The central premise is to keep one’s investment strategy simple, shunning complex financial products and expensive financial advisors. Collins emphasizes the importance of patience, consistency, and a long-term perspective in building wealth. It offers practical advice on saving, investing, and tax strategies, aiming to equip readers with the knowledge and tools to achieve financial independence.
Here are my favorite twelve takeaways.
Save half your income
“Try saving and investing 50% of your income. With no debt, this is perfectly doable. The beauty of a high savings rate is twofold: You learn to live on less even as you have more to invest.“
The simple formula
“Here’s the simple formula: Spend less than you earn—invest the surplus—avoid debt“
Don’t time the market
“if we know a crash is coming, why not wait to invest? Or, if currently invested why not sell, wait till the fall and then go back in? The answer is simply because we don’t know when the crash will occur or end. Nobody does. Don’t believe me? Think you can? Test yourself here: http://qz.com/487013 … The world is filled with sad investors who got the first right and then sat on the sidelines while the market recovered and marched right on past its old high. Market timing is an un-winnable game over time.“
The three tools
“Stocks: VTSAX (Vanguard Total Stock Market Index Fund). Stocks provide the best returns over time and serve as our inflation hedge. This is our core wealth-building tool.
Bonds: VBTLX (Vanguard Total Bond Market Index Fund). Bonds provide income, tend to smooth out the rough ride of stocks and serve as our deflation hedge.
Cash. Cash is good to have around to cover routine expenses and to meet emergencies. Cash is also king during times of deflation… We used to keep ours in VMMXX (Vanguard Prime Money Market Fund). At the time interest rates were higher and money market funds typically offered better interest rates than bank savings accounts. But with interest rates currently at historic lows, money market funds pay close to zero percent. Bank interest rates are now slightly higher. Plus they come with FDIC insurance on accounts up to $250,000. For these reasons, we now keep our cash in our local bank and in our online bank, which happens to be Ally. Should interest rates rise and money market funds again offer better rates, we’ll switch back.“
Stocks perform best
“If you look at all asset classes from bonds to real estate to gold to farmland to art to racehorses to whatever, stocks provide the best performance over time. Nothing else even comes close.“
Stocks/bonds mix
“For the wealth accumulation stage an allocation of 100% stocks using VTSAX is the soul of simplicity. But as we’ve seen, some studies suggest that adding a small percentage of bonds—say 10-25%—actually outperforms 100% stocks. You can see this effect by playing with the various calculators found on the internet. As you do, you’ll notice that adding much beyond 25% bonds begins to hurt results… The difference in projected results between 100% stocks and an 80/20 mix of stocks and bonds is tiny. How those results actually unfold over the decades is likely to be equally close and the ultimate winner is basically unpredictable. For this reason, and favoring simplicity, I recommend 100% stocks using VTSAX. That said, if you are willing to do a bit more work, you could slightly smooth out the wild ride and possibly outperform over time by adding 10-25% in bonds. If you do, about once a year you will want to rebalance your funds to maintain your chosen allocation. You might also want to rebalance any time the market makes a major move (20%+) up or down. This means you will sell shares in whichever asset class has performed better and buy shares in the one that has lagged… do this in a tax-advantaged account like an IRA or 401(k) (we’ll be talking about those shortly) so you don’t have to pay tax on any capital gains. Having to pay capital gains taxes would be a major drawback and another reason to focus on holding just VTSAX. This rebalancing is simple and can be done online with Vanguard or most other investment firms. It should only take a couple of hours a year.“
Alternatives to VTSAX
“you can in all probability find a reasonable alternative in your 401(k). Here’s what you are looking for:
A low-cost index fund.
For tax-advantaged funds you’ll be holding for decades, I slightly prefer a total stock market index fund but an S&P 500 index fund is just fine.“
Where to deploy your money
“here is my basic hierarchy for deploying investment money:
Fund 401(k)-type plans to the full employer match, if any.
Fully fund a Roth if your income is low enough that you are paying little or no income tax.
Once your income tax rate rises, fully fund a deductible IRA rather than the Roth.
Keep the Roth you started and just let it grow.
Finish funding the 401(k)-type plan to the max.
Consider funding a non-deductible IRA if your income is such that you cannot contribute to a deductible IRA or Roth IRA.
Fund your taxable account with any money left.“
Safe withdrawal rate
“If you are curious, here’s an overview of the Trinity Study you can read for yourself: http://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx In summary: Withdrawing 3% or less annually is as near a sure bet as anything in this life can be. Stray much further out than 7% and your future will include dining on dog food… If you absolutely, positively want a sure thing and your yearly inflation raises, keep your withdrawal rate under 4%. And hold 75% stocks/25% bonds. Give up those yearly inflation raises and you can push up towards 6% with a 50% stock/50% bond mix. In fact, the authors of the study suggest you can withdraw up to 7% as long as you remain alert and flexible. That is, if the market takes a huge dive, cut back on your withdrawals and spending until it recovers.“
Flexibility in retirement
“Within that 3-7% range, the key to choosing your own rate has less to do with the numbers than with your personal flexibility. If as needed you can readily adjust your living expenses, find work to supplement your passive income and/or are willing and able to comfortably relocate to less expensive places, you will have a far more secure retirement no matter what rate you choose. Happier too I’d guess.“
When to rebalance your portfolio
“once a year I’ll reassess. The ideal time is when we are adjusting our asset allocation to stay on track. For us, that’s on my wife’s birthday or whenever the market has had a 20%+ move, up or down.“
Give to charity
“It is best to concentrate your giving. We have selected just two charities. Giving small donations to many charities might be satisfying to you, but it dilutes the impact and a greater percent of your gift is eaten up in the processing of it. Many small donations also gets you on many mailing lists. Never give to phone solicitors. The more I see a charity advertising, the less likely I am to believe they are focused on delivering my cash to those they claim to serve. You need to do your homework. In addition to scams, many charities simply aren’t very efficient in delivering your dollars to those in need. Several websites vet charities. This is the one I’ve used: www.charitynavigator.org“
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