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

Everyone very excited about today's episode, probably one of the most requested and I would also say one of the most important episodes we've ever done and it's time to do it again, but also to do it in a better way. We will be talking to jl.

collins

,

author

of the

simple

path

to

wealth

and stock series which you can find at jl

collins

nh.com, probably one of the most influential books in this community, has sold hundreds of thousands of copies and what I think is really important to keep in mind The thing about it is that that's literally on a zero-dollar marketing budget, even though every single one of those copies sold entirely due to word of mouth because people have been looking for this information, they've been looking for a way to Share this information with friends and family.

The members and reviews for this book are like nothing I have ever seen. We all know that there are books that are simply faked out into statistics that have huge budgets behind them and are the only reason they are in it. The level they are at is because money has simply been thrown at them. This is the opposite of this book having had the impact it has had and has the reach it has because people want everyone to know about this information. and in the phi community i can't think of a single book literally to date that has had more impact than just the

path

to

wealth

and we have the good fortune to have the

author

of that book, jail collins, on the show with us today For I really talk about the why behind this book, but even more important is the actual philosophy, the fundamentals of this investment strategy, which can be defined simply as: "Let's keep it

simple

and you will do better with that welcome to the latest in finance collaborative personnel". shows this is choosefi, okay, I'm really excited to dive into today's episode and we're going to talk to the author of The Simple Path to Wealth and Stock Series JL Collins and help me with this.

I've got my co-host Brad here with Me today, Brad, very exciting today, how are you buddy, oh man, I'm doing pretty good, it's hard not to be good when you're getting ready to talk to J.L Collins and like you said, the series of actions, the simple path to wealth, I mean, it is. It's no exaggeration to say that that content changed my entire life, it changed the trajectory of my investing life and it's put me in a place where I feel comfortable investing and it can't be overstated how important that is and yeah, I mean, Jim has become in a friend from us a friend of the show a friend of mine personally is amazing he's an amazing human being and uh with that jim a uh a real heartfelt thank you for coming back to the show welcome oh it's an honor to be asked I think I should end the interview now because there is nothing I can say that will surpass what that introduction was, so thank you for the kind words.

I'm honored that it was well deserved, but obviously we're going to dive into the stock. series, but I think they're on the simple path to riches, but I think the way to start is to actually do an origin story and not so much an origin story for you, although there will probably be some overlap here, but really a The origin story of this book is the simple path to wealth because I think those two are intertwined and specifically the reason why this book has also done that is because people want to share and what you summarize in this book is probably the easiest thing in the world. to share with people who are trying to make sense of what has always seemed so complicated and out of reach, so let's start there, tell us a little more about the origin of this book and do you know what explains the success that you have seen with but also why you took the time to create it.

If I could, if you'll allow me, I'll go back and start with the origin of the blog because the book was enough growth for the blog at jlcollinsnh.com. In 2011, my daughter was in college. I managed to talk her out of everything finance-related by pushing the information too hard, too soon, too quickly and decided she really needed to write something for it. I wanted her to know how to do it. invest and how to manage money uh for the day she was ready to hear it and in case I wasn't there to deliver it personally and a friend of mine said you should archive this on a blog and it's nice interesting maybe share with some friends and family and I had no interest in starting a blog but I love the idea of ​​having a place to archive this instead of just pieces of paper or documents on my computer so I did it and much to my amazement the audience started As I grew up, ironically my family and friends didn't care, but there were strangers who found their way there and the next day I learned that I had an international audience and that I had had work that had been put together and I had always had the ambition to write a book, but I never had a topic in mind until then, so let's see, it would probably be around 2013.

I started working on the book and finished it in early 16 and published it that spring and as I told people a lot of times, by design, there's nothing in the book that you can't find on the blog, the book is a little more concise, it's better organized, I won. I'm not saying the writing is more polished, I will say I spend more time polishing it and let the reader decide if I succeeded or not, and I actually wrote it for my daughter and I didn't know it, I expected it to be. be successful, at least within the fi community, I never dreamed that it would be the success it has had or that four years later it would sell even better than every year, it sold better than the year before, which is just amazing.

For me, that far exceeded my expectations and someone observed to me that there is a voice of authenticity in it that people respond to and I suspect it's because it's authentic because this is the information that I wrote for my daughter. I have often said that there is only one person I have ever tried to persuade about these things and that is her and by the way, if anyone is curious right now, she is a young adult, she is on board and she has absorbed the information and I didn't have to worry. When she was younger, I did well, so jl, the book came out in 2016.

And you just said that 2020 was actually the biggest selling year, what do you attribute that to? Well, I think Jonathan pointed the finger, uh, in his way. introduction has been completely by word of mouth when I launched the book I put a lot of effort into the launch. I send copies to other bloggers who are my friends. I offered it to the first hundred of my readers. Who asked? for that, a free copy, a free online copy with the caveat that they put a review on it and I said, hey, you know what's good and better and different, I just put up the review, obviously, I expected it to be good and it was, but that's all.

What I meant was in that first month and then the book did pretty much what I expected it to do, it ramped up pretty well in the summer, it came out in June like May or June, I'm forgetting, now you can ramp up. very good and then it started to go down and then it spiked back up a little bit for Christmas and I thought that was it and then it would just go away but in 2017 it started to rise again and 2017 was much stronger than 2016 monthly 2018 was stronger than that 2019 It took 2018 by storm and 2020 is taking 2019 by storm and I think it's just word of mouth, as Jonathan pointed out, so that's the arc of the book and I'm sure people starting this new year will be very interested and will definitely read it, but now let's talk about what is the message that this book contained that really captured the imagination because I think it crystallized well.

I guess Brad, why not? Why don't I give it to you quickly? Brad, what did this book and blog series mean to you? And then maybe we can have Jl, kind of an engineer, a little bit more about his own experience. what experience had led me to this, you know, to this book, yeah, I think for me investing always seemed like a black box, it always seemed like something where you needed to spend thousands of hours understanding that you needed inside information, you needed something that no I don't know cfa or some cfp license or something like that and this is coming from me who was a chartered accountant and theoretically understood some things about finance but it still seemed impenetrable to me and when that happens usually your brain just shuts down and says oh that it's impossible, that's for someone else, I could never learn that and I think that's largely where I was until I started reading the values ​​series on Jim's website, jlcollinsnh, and it gave me hope, it gave me a I feel like okay, if I can control what I can control, what the expense ratios are, if I can buy a small piece of every company in America, I can benefit from the ingenuity and hard work of 150 million Americans, and I mean, these they were the kind of the ideas that I had and okay this will give me the best chance of long term success of a 40 50 60 year wealth right and I think for the first time I took it from wow I need some stock advice I need to get lucky I need to play this game or this type of Wall Street casino in oh wow, I'm buying real companies, I'm buying little bits month after month, year after year for decades, and that will take me somewhere where I'm going to Being very, very happy with Brad and what you just said, I think it's important to point out that your experience reflects this, not that this is the only way you've invested, like the simple path to wealth.

It's not the only one, it's not the investment advice you followed throughout your entire investing career, but rather what emerged from those lessons learned. I would love for you to explain it to the audience. I'm absolutely right about that, in fact the investing method I describe on the blog and in the book is the last method I came to and the best and unlike Brad, I loved delving into this stuff, but the book It is written exactly. For people like Brad and I'll explain, I'll go back and explain that for a second I enjoyed investing, it was one of my passions and I went through all the iterations, in fact, one of the dirty ones.

The little secrets, so to speak, is that I achieved financial independence not by index investing, which is what I recommend now, but by picking, excuse me, picking stocks and mutual funds managed by active managers who picked stocks, so the point It's not like that. that those things don't work, they do work, the point is that it is much more difficult and less powerful than investing in a low-cost index fund, I have said it frequently, in fact, one of those backhanded compliments that I sometimes receive My opinion on investing is oh this is great for beginners and people who don't really want to learn how to invest well and I appreciate the comment which is great but I would say it's the best way to invest for everyone and I've said that.

If I had thought there was a better way, a more powerful way to invest that required a little more work, that's what I would have written about, but the conclusion I came to is, ironically, counterintuitively, that the most powerful way to Investing is also the simplest and easiest. I had an epiphany: My daughter came home from college one Christmas probably and of course I immediately started talking to her about investing and she raised her hand and said, Dad, Dad, I get it, I know it's important. I don't want to have to think about it all the time, kind of like what Brad just said and that was the epiphany.

A light bulb went on and I thought, "You know, I'm the weird one here." Most people don't want to think. about these things like I like to think about them most people like my daughter likes brad like you have it more important like many of the people listening have more important things to do with their lives you know they are building businesses and bridges and curing diseases and you know, like my daughter, like you, you know that investing is important but you don't want to take up a big part of your life and, again, the good thing is that if you follow the approach that I described, it will take up a very small part of their life. in your life, you can set it, forget it and get on with the most important things you're doing and over time you'll get the most powerful result you can reasonably expect, so I think we've done a great setup here for why this is important and maybe even a little hint as to what this is, but let's go ahead and get right to the core when we say index fund investing or the simple path to wealth what are we really talking about how is that possible? that something that's simpler and less expensive and doesn't require you to have a really smart person driving enough, how could you do it better?

You just said that if there was a better route that could get me there more consistently, I'd be doing it. that and writing a book about it, how is it possible that the simplest is the best option? Why don't we go ahead and share it with the audience? Well, let me start with an illustration and again I think of this because of a comment. brad said a moment ago that initially, before reading my book, he was looking at this world of investing that seemed incredibly difficult and complex and complicated, and that's not his imagination, it's difficult, complex and complicated, and it is like thatby design because the more complex it has become: the more Wall Street can charge in terms of fees, the more they can encourage people to come into their arms and the more they can say, don't worry, you're pretty far ahead on this, bring us your money and we will take care of it for you and of course I will charge you a high fee for it so imagine. that you are sitting at a huge banquet table and this banquet table groans under every type of exotic dish you can imagine and that you were tasked with not only choosing the ones you wanted to eat, but also trying to understand how these things work. were made and what my book does is come and say, do you know what in this little corner of that banquet table are the simple foods that your body really needs to thrive better and you can put your arm in front of those foods on that table and it sweeps everything else to the ground, all those complicated things that exist because you don't need them and you'll do better without them and those simple little foods in the investing world are low cost index funds, why do they work better?

There are a couple of reasons: one is that they are low-cost Jack Bogle, who first invented the first index fund. He is the founder of Vanguard. I was the first to talk about the concept of indexing. One said performance comes and goes. The costs are. Always and so actively, active fund managers or stock pickers are always trying to outperform and sometimes they do and sometimes they don't and on average outperform, however counterintuitive it may be to outperform the market as a whole. , it's extraordinarily difficult, something on the order of 20 active managers in any year can do it, so you have an 80 percent chance of being 80 percent of active managers in a year when you go out five years, ten years, That percentage that performs better gets smaller and smaller as you time you're out of 30 and, by the way, investing for long-term gain, the number of active managers outperforms the market is less than one percent, which is statistically zero, but of course the marketing people who sell these funds point to people that I've done it, I think Warren Buffett and I always cringe when I hear people say well, I'll do what Warren Buffett does. , like I mean it's like saying you know I'm going to do what Mike Tyson does and get in the ring with him well good luck you know you're not Mike Tyson unless Mike you're listening and if you're good to you Hi Mike, and you're probably not Warren Buffett either unless you're listening to Warren and well.

I'm talking to you again and the interesting thing, if I could jump in here real quick, is in Warren Buffett's 2013 annual shareholder letter to Berkshire Hathaway, to his Berkshire Hathaway company, where he wrote basically about how he would advise the manager of his wealth. to invest the money and said my advice to the manager couldn't be simpler: put 10 percent of the cash in short-term government bonds and 90 in a very low-cost sp 500 index fund. I suggest avant-garde. I think they trust in the long term. The long-term results of this policy will be superior to those achieved by most investors, whether pension fund institutions or individuals who employ high-fee managers, so it's fascinating that you're talking about Buffett as one of the few examples of someone who could perhaps overcome it. more than 30 years, but still his advice is exactly his.

Low cost index. It's not really surprising if you think about it because Warren Buffett is not trying to sell you well on his services and he knows what it takes to make it happen and he has watched me. I'm sure countless people try to do this and fail, so you realize you're an outlier. I suspect Mike Tyson would say the same thing to the average person about boxing, you know, I mean he would say look, you know, it takes a tremendous amount of effort, a tremendous amount of training and, frankly, it takes some physical gifts, that's what Same with investing and Mike Tyson is blessed with boxing and Warren Buffett is blessed with investing and I'm not Mike Tyson and I'm not Warren Buffett and I'm humble enough to know that.

I would like you to know to make sure that we recognize that there are people listening to this who don't know what any of these terms mean. They are hearing them for the first time. we just mentioned something, we talked about cost, we talked about actively managed funds, we talked about index funds, maybe people right now are thinking about individual companies that you buy, so individual stocks that you could buy, I think it's probably important that people I really have an idea of ​​what an index fund is, what that means, and specifically you, now that we've mentioned this Warren Buffett s p 500, is that the one that you talk about in your book gives us a little bit of sense for the Definitions of terms and why we are putting so much emphasis on index funds, so let's start with what a mutual fund is and/or an ETF which stands for exchange-traded fund.

There are slight differences between them, but for the purpose of our conversation, you group them together so that it's simply a fund or an ETF takes a bunch of money from a lot of different investors, pools it together, and then invests in something and the funds tell you what they're up to. to invest, so the s p 500 index fund invests in the 500 largest US companies that make up the sp 500 index, which tracks those companies, an actively managed mutual fund might focus on a different type of parameter, it might be a fund sector, it could focus on energy or technology, but it is a pool of money that comes in and is invested according to the guidelines set by the fund, so what is the difference between active management and good indexing?

An actively managed fund is one that attempts to pick stocks that will outperform the index over time, and that's expensive. do, among other reasons, I mean those guys are very well paid, they usually have analysts working for them or pay extra, so it's an expensive route and it's reflected in what you, the investor, pay for the fund, what is called expense. ratio Now there are many other ways that funds can dip into your pocket, but to simplify for now, the expense ratio is the main one, every fund index or otherwise has an expense ratio and it is very important how high is that expense.

Interestingly, the relationship is with the advent of index funds and their growing popularity which has had the benefit of reducing the fees charged for actively managing the funds, so that even people who still want to actively invest have been blessed, for so to speak, with the arrival of index funds. funds because it has reduced its costs, but an index fund because it doesn't have those expensive managers like rock-bottom fees to put that in perspective, uh vtsax, which is the fund that I recommend the most, has a zero point four percent fee, which is what closest. to zero, as you can get, there is no actively managed fund, I think the average is something like one percent.

I think it's very important that people like to translate that into something that's meaningful because I can imagine someone telling themselves that one percent is not that. bad, that means I keep 99, you know what it is, you know, great point about the percentage is less, but the one percent they still let me keep the 99, what's the problem, yeah, and you know, the other thing It's that they're not just presenting it. that way, but they also say, you know, if we can return 18 20, which gets us to one percent, well, that's great if we return that kind of percentage over time, but the one percent compounded gives extraordinary results, I mean, it's just amazing how much.

The money, which is your money, goes into their pockets and not yours. The best way to look at it is assuming you have a million-dollar portfolio and you're going to withdraw four percent of that, which is commonly considered reasonably safe over time. Okay, and you're in actively managed funds that charge one percent, well, you're withdrawing four percent, which is forty thousand dollars. One percent of your annual income, ten thousand dollars, goes to the people who manage those funds, so that's the best way to look at it. one percent isn't so good, it's just one percent versus 99, but how much of your income and even if you're not using your portfolio, that one percent is still being taken from it, which reduces the amount of money that can grow for you?

It may increase for you over time so we can get lost in the weeds on the math of this, but maybe it's enough to say that one percent is a big deal over time. I'm going to give this back to Brad because I know Brad. I've been able to run them and tell stories with them, but if I could quickly recall, we ran this example where someone is paying, you know, one percent expense ratios and then one percent assets under management, if I could just drop a version of that. You know, very quickly, back in the envelope for the hearing, what did he estimate?

What was the difference for an individual during his investment life? What did that two percent difference mean over his investing life? It's good to have an accountant in the group and Jonathan. You know me so well that he was literally angrily calling out this article while JL was talking about it. Admittedly, this is an article I wrote years ago, so the actual performance, the raw performance I anticipated, is a little higher than is probably reasonable, but the math works, so that's the key part. here, so I talked about 100,000 invested and this is over a 40 year period where you're investing a thousand dollars a month.

Well, this is a 40-year investment lifespan where you're starting with 100 grand. Let's say you get a raw return of 9, so it's only a nine percent annual return and again, it's higher than we anticipate now, but let's leave that aside, your balance in year 40 would be 7, 2 million, okay if you invested that money in vanguard vtsax which at the time had an expense ratio of 0.05, it actually went down as jl just told us you would have lost around a little over a hundred thousand dollars in fees, so instead of having 7.2 million I would have 7.1 million. If instead you put it in a typical fund with a one percent expense ratio and it made a net return of 8, you would have lost $1.9 million in fees, only have about $5.3 million, and if you doubled this and you had that expensive fund plus an investment advisor who charges you one percent of assets under management, so you only got a net return of seven percent, you would have lost $3.3 million in fees, so I would have a little more than half of what I would have had if I had invested this in vtscx, so that is a clear example of how fees matter and accumulate over these decades over a lifetime of investing, so Brad, you mentioned vt sax again going back to the definition of terms here because we talked about this sp 500 fund, by Warren Buffett, but, Jail Collins. you're talking more about more, a little more about this vt sax.

I would love for our audience to understand what that represents and the only thing I would like to add is that when we own an index fund in a particular sector that means we own all the companies, which means we potentially own winners and losers and How is it possible that if we own winners and losers we will do better than someone who only owns choosing the winners well, let me start with the last one, if you could find someone who only picked the winners, that person would do it better, but that person isn't even Warren Buffett, not even Warren Buffett just picks winners, so that's not a very apt comparison.

It is Vanguard's total stock index fund and that means it invests in virtually every publicly traded company in the United States and there are around 3,600 companies in the fund that Warren Buffett has recommended. I don't remember what the call letters are but it is the vanguard 500 index fund and it invests only in the 500 largest companies in the US which by the way is the same fund as jack bogle the founder of vanguard and the index fund creator, that's the fund he invested in his whole life, he now passed away a couple of years ago and it was the first fund that mr bogle started, so are these guys wrong if they should be on vtsax?

No, I mean, it's an amazing fund and anyone who has it can comfortably maintain it forever. In fact, there is very little difference between vtsax and the sp 500 fund because these index funds are cap-weighted, which simply means they own more of the largest companies, so about 80 percent of vtsa x is in the s p 500 and then the other 15, 20 percent are in smaller medium-sized companies. Small and small cap companies. I like to have a little bit of small and mid-cap companies, so I prefer that, but it's kind of like if youWhether you like a little hot sauce on your eggs or not, it won't make much. long-term difference, I tell people they know, if they buy the index, the sp 500 fund, and I buy the total stock market fund, in 10 years one of us will have done a little better than to the other, but it will be very very close and you cannot predict who will have done a little better, so don't worry, you know it is very interesting, it is actually timely now that we enter 2021, that we actually have this case interesting usage that actually points a little bit towards the advantages of one over the other and that's specifically with tesla a real market driver here and I'd love to hear your perspective on this but let's highlight how these two would work as well that with tesla you have a relatively small market cap company that has just exploded and become huge, massive, massive and now, because of its sign, it meets its qualifications and is now being added, almost retroactively, to the s p 500 , but it has a huge market cap and is only now being added to the s p. 500while vt sax is a publicly traded company and you owned it the entire time it was public within the United States, so you saw some of that profit included on your personal return.

This is a very strange example, maybe once in a lifetime example where tesla is such a ridiculous outlier that the sp 500 would not have captured the gain in the same way as a vtsax. It's one of those things that I love your comment about if you've thought about that or if that in any way adds something to your opinion, uh just because they're talking about when they add, you know, tesla to the sp 500, they were really worried about to shake things up a bit while they calculated it. What do you think about it? That's a great question and a great example, so let me start by saying one of the things I love about index funds, whether it's the 500 index or the total stock market, they are what I call self-cleaning is a term I'm into. proud because I created it what it means is that you are not trying to pick the winners and losers because you realize you can't do it, but you benefit from the winners and if some If a company hits the rocks, it will walk away from its portfolio, so what is the worst that can happen to a company?

Well, you can lose one hundred percent, and by the way, you will fall off the index long before you actually lose one hundred percent. Unless something happens very quickly and catastrophic, think about Enron anyway, what's the upside? Well, the edge is 100, 200, 10,000 or 100,000 percent, kind of like Tesla, so it's always going to be the index, it's always self-cleaning, you're always picking up the winners and you're always getting rid of the losers and Tesla is a great example of how owning the entire stock market works in your favor. A very dramatic example of this. There are much less dramatic examples of that and this is one of the reasons I like the total. stock market is that it will pick them up, uh, all the companies that eventually make it to the uh 500 index fund index, it will pick them up early in the same way, although to be fair, if a company in the index starts to lose its touch and crash down. if you own the 500 index once it falls from that index you are out of your portfolio if you own the entire stock market it will fall even further before it falls so I'm sure there is an example I can't think of one like you pointed out that Tesla is a great example of the advantages.

I'm sure there's an example of one moving down that would have been better off getting rid of earlier with the s p 500 than with the entire stock market and that's probably one of them. Of the reasons why those two follow each other as closely as they really do, does that make sense? Yeah, that was great. I just thought it was a very timely analogy that really highlights the difference between a s p 500 versus a full stock market fund right and the other thing that doesn't I don't know if you want to record this for now with Tesla.

I now own Tesla. Well, actually I have for a while, but I don't have to worry about Tesla's future if Tesla continues to kill it like he has. I will continue to benefit if Tesla starts to slow down for any reason, well it's one of the 3600 companies I own, it will slowly decline and be replaced by something else, uh, and that's the difference between owning it in the index and owning it as a stock, yeah, Jim, I love that analysis that just when you said I now have a little bit of Tesla like me, my eyebrows raised, but I thought you had actually bought individual stocks, I said, no, leave it, it can't be. but yeah, you're right, as part of having a total stock market index fund and now a sp 500 fund, we all own a little bit of all these companies, but like you said, it's self-cleaning and that's again something that's very reassuring. for me and I wanted to get back to the rates because we actually get this question a lot and I just want to make it clear when we talk about vtsax here like we're not giving very specific advice to go out and buy exactly this obviously this is for informational use only but we , you and I and Jonathan believe in this for ourselves and I think that's the important thing we're talking about.

Our own experiences are correct and you have talked for years about Vanguard and VTSax, but what a lot of people have asked is what about loyalty and their zero percent fees. They have these new funds. I think it is what it is. Fz Rox is your total. stock market yeah fz rox and that has a zero percent expense ratio like we actually get emails like sell vtsax and buy this fcrox like you know and I say there are a lot of good funds out there you know fidelity schwab vanguard other companies There are a lot of funds that are substantially similar, but I guess my question to you is why do you like Vanguard and what is your answer to that question about loyalty or just, it's not point zero four, it's point zero two , what do I do then?

That's a broad question. There are actually a couple of questions that are well covered, so you may have to help me remember them as I answer the ones I start with. So, first of all, let me. Let's say an an sp 500 index fund is essentially the same whether it's avant garde or fidelity or tbro price or whatever because it's tracking an index, the same goes for uh btsax advan total stock market index fund is vanguard and I don't know off the bat what loyalties are, but it will be essentially the same portfolio, so you should get an identical return.

The reason I prefer vanguard is vanguard is the only investment company that is structured in a way that respects its interests and the interests of the investors are identical and that is because the investors actually own the vanguard funds, which which is a profound difference because it motivates vanguard to continually reduce costs, so you correctly mentioned that vtsa x used to have an expense ratio of 0.05, in reality it used to be higher than that and vanguard has been reducing it constantly because that is the culture at vanguard is to reduce costs, there is no point in having higher costs at vanguard because that would simply create a taxable event that would go into our pockets as investor loyalty and every Also, this is not exclusive of Fidelity, but all other investment companies serve two masters.

They certainly serve their investors who invest in their fund. That's how they keep people coming back, but they also serve their owners. Now Fidelity turns out to be a private company. Prices are examples of publicly traded companies, so their shareholders are their owners, but of those two masters, the owners will always be number one, so loyalty and price are three, and all other companies Their main motivation is to earn the most money in fees. of their investors as they can now if that's the case why don't they have zero fees? Well, it's a competitive loss leader move that they're obviously trying to poach people from Vanguard and they've done it based on pricing, um.

I'm not going to change because I know their heart is not in lower costs, their heart is only in something promotional, I don't trust how long it's going to continue, someone has to take care of the cost of running that fund, so basically what they What we are doing is shifting the burden to people who own other funds that have fees. I have an ethical problem with that, so I wouldn't resort to fidelity for that. The other thing is that when you get fees they are important, but at some level they become. academically when you're at point zero four percent, you're not really at that point, you're not going to have the kind of result that you so eloquently described with one or two percent, so you know there's a point where you can stop .

Chasing it, there's a reason that when Jack Bogle died, he was worth, I think, $300 million, which is a lot of money, but if he had structured Vanguard the way other companies are structured, he would have had several billion dollars. , but that's because I chose to create a company that favored the investor rather than the owner. When you talk about these different types of funds, I think one thing is that people have often stayed away because suddenly it's simple and it makes sense. like you're ready to get started and then one thing that maybe one of the things that you run into is that they cost to get started and it used to be that with vtsax it used to be what I think you needed like as much as ten thousand dollars to get started with. the bottom and I think that has been reduced.

I'd love for you to talk about what it looks like in general to start with this kind of approach and then maybe that ties into that as well. you know, etfs versus mutual funds are on your mind with your community and your audience, how it's better for people to start now and you know if they don't have ten thousand dollars, yeah, before we go any further with that, if I can add One thing For our last conversation: If someone has a fidelity index fund or one of these other companies says in their 401k, you certainly don't have to run away from it, since they say it's the same portfolio as you.

Well, let me add a comment on that too. In fact, I have total stock market funds with loyalty with Schwab and with Vanguard. I agree with most of what JL Collins just said: I would never go from 0.04 percent to 0.01 or . 02 or 0.03 or zero, I just don't make moves based on that, but wouldn't you know I don't have any, no problem, choose whichever one offers your 401k and be happy how low the fees are and then you know, if you're choosing in a vacuum, you can certainly appreciate Jailcon's perspective on how forward-thinking it is about us. I mean, they just say his heart is 100 in the right place, so I'll just double down on what you just said, yeah. and it's much more important to invest in low cost index funds than to worry about who provides them correctly, so my question was the cost to start with, yes, so Vanguard is not only continually reducing costs as part of their corporate culture, but They also continually try to make things more accessible while maintaining value for their existing shareholders, which is why it used to be that vtsax had a stock version for investors.

I don't remember what the quote letters were for that, but there were three thousand. The minimum dollar entry to get into that and vtsax was ten thousand and it had a slightly higher expense ratio so by the time you got to 10,000 you should have switched it to vtsax to get the lower ratio. Now they have done it. They took that investor's stock and they just made the entry, since last time I was looking for at least three thousand dollars for vtsax, which is their version of admiral stock, as they call it, so they reduced the entry cost of the same way.

Now we are cutting expenses, what happens if you don't have three thousand dollars? Well you mentioned etfs and there is a version of etf I think it's vti or the call letters for that and one of the nice things about an etf is that you can buy it with any amount of money so you can start with as little money as you have and then keep adding to it if you want, if you want to do that and there's nothing wrong with holding an ETF long term, it doesn't have to be a mutual fund. Let's differentiate that if you don't mind because I mean now we're talking about an ETF versus a mutual fund.

Can you distinguish some of the pros and cons of each or even if it's not a pro or con? some of the differences are for someone who is trying to choose between the two well lets start with the similarities so like i say i think vti is the etf exchange traded fund version of vtsax they have the exact same portfolio who have, I think same expense ratio or it's very close, the ETF could be slightly lower. ETFs were primarily created as trading vehicles so you could take a mutual fund and trade it during the day traditionally and to this day if you buy or sell a mutual fund you place the order at some point during trading hours and You will get the price at the close of the market that day, so you can place an order at 10 in the morning and watch the price rise orbefore your order is executed, if you bought an individual stock, your order is executed almost immediately at whatever price it is and an ETF simply takes a portfolio of mutual funds and allows it to trade as if it were a single stock, so when buy an etf you get any price right away if you are buying and holding for decades which i recommend you don't have any need to do if you are trading in and out of your fund then you will want an etf but you are also making a terrible mistake.

Warren Buffett once said that, you know, in the last century the market started at 600 and ended at 12,000. How can anyone lose money in a market in a century like that? He said it's easy to dance, try to dance in and out of the market, they try to buy time in the market, so at least I'm not interested in trading, I don't care about that, but that's one of the key advantages, uh, or distinctions , maybe a better word than advantages. that ETFs have, but the key is that they are very, very similar, that the differences are much less important than the similarities for our type of investment, so for someone who maybe stays and tries to wait until they get that three thousand dollars to invest in vtscx in your mind, there is no reason not to start buying vti shares, in that case the etf is at least at the time of registration and is below 200 per share, as if that was a point of differentiation and someone came to you and said, "It's going to take me a year to save three thousand dollars.

If I started buying individual shares of this ETF, what would be your response to that? Well, it's two things, one." There is no reason in the world not to start with the ETF version, on the other hand, a year is not time. I mean, if you're talking about investing for decades, if it were me, I'd probably just save the money. over the course of the year, but if someone wants to get started right away and I appreciate you knowing that maybe they'll read my book or blog or something else and get excited, then there's no reason not to buy the ETF again, my only concern is that There are other differences between ETFs, but they are so small in my mind that I can't even remember them right now even though I wrote a post about it so listeners can search for that post.

The only concern I had about ETFs is, again, that they make it very easy to trade in and out of them and trying to time the market and trade in and out is so tempting and so destructive to your wealth that it will be my only concern for you. I know it's one less temptation, but in terms of portfolio and long-term performance it will be the same. I think I wanted to add a little bit more flavor here and I hope it adds value to our audience that maybe is at At this particular point in the journey, um two things, one with ETFs, traditionally you had to buy a lump sum of shares, so that with vtsax, if you were 35, you wanted to contribute to this, you could just contribute the 35 and buy any fractional part of that mutual fund. that historically you didn't want much with an ETF and again you can hear there's a caveat there, historically you needed to buy a whole share, for example if the ETF is selling for 170 you have 180 then you can buy a share for 170 and then you have 10 dollars on margin, on the other hand, if you are buying the mutual fund, you could buy 180 of that mutual fund and all your money is at work, you are not on margin, the caveat now is with tools like m1 m1 Finance. is the one you guys have heard me mention repeatedly, now it will allow you to buy fractional shares of etf so you can find something like vti on the m1 financial platform and you can buy a fractional share of this amount, the other thing that came Please note that it does not I know if you have an answer on this, but I feel like I've heard this before, if I bought this etf called vti on the vanguard platform and had something like you know. 30 40 50 100 shares, you would easily go over the 3,000 limit, you know, do they have some sort of in-kind transition on the cutting edge platform where you can go from vti to knowing the mutual fund alternative if you wanted to do that? which I am, I'm just wondering if I'm making this up or if you've heard something similar about that, you know, I don't know the answer to that, uh, and it's an important question because if you hold these things in a tax-advantaged account like an anger , you can just go from vti to vtsax or the other way around and because it's in a tax sheltered account there are no tax consequences, but if you keep it out of a tax advantaged account it's possible that by selling your vti to buy vtsax you could generate a capital gain if you have a capital gain or a capital loss and that's something to consider.

I know in the old days when they had investor shares and admiral shares, you could go from one to investor shares. shares to the admiral and it was not a taxable event if that is true of going to the etf to the mutual fund frankly. I don't know, I've never looked at it, but I'm sure if anyone is curious the cutting edge website will tell them. or you can call them and they can answer that for you. I wanted to switch gears and talk about the time in the market versus the time we just went through, it's actually very interesting, well we're all living in 2020, a very interesting year and there.

There were some people who even in January or February said I needed to take my money out of the market and then those people in March felt really good about it, but then other people said I needed to keep my money out of the market and then the market went back to go up and they missed the trip and then, but even now, some people would say, well, why do you know, if you know it's going to go down, why don't you take out all your money like you know? Why not, what if we could skip when the market goes down and just buy it?

You know, when it goes up. Wouldn't we? Wouldn't we earn more? You can see what I'm preparing for you here in jail, but uh. but I'm just curious why not time the market. We could jump through all the obstacles. Wouldn't that be wonderful? You know, and it would be just as wonderful if I could magically turn random objects into gold. The problem is that I can't do that and now no one can time the market. How do I know that no one can time the market? the market was about to crash, wait until it bottoms, stand back and repeat that you would reliably eventually be much, much richer than the much more acclaimed Warren Buffett.

There is no more powerful superpower in the financial world than the ability to do that. That's one of the reasons why many people try to do it. That's what we meant when I said Warren Buffett said: How do you lose money in a century when the market goes up so extraordinarily that you try to dance in and out? in and out of this, you're trying to time the market, it just doesn't work now, sometimes some people get it right in 1987, right before Black Monday, which was, I think, in October, like weeks before there was a woman on Wall Street by the name of Elaine Garzarelli, who predicted it almost accurately, almost accurately the day, almost accurately the level of that drop, which was the largest percentage drop in history, I think it was about 25 in one day and of course she was immediately and It was documented that she made this prediction, it was immediately acclaimed and on all the talk shows and what have you and everyone thought that this was a woman who knew how to do this?

She was lucky she couldn't repeat that constantly. That's not a lane slam, no one can do that. The analogy I use is that if you knew someone who won the Powerball lottery, you wouldn't look at that person and say, Brad, you've figured out how to pick winning lottery numbers. You would not do that. Look and say Brad, he was very lucky because so many people were buying lottery numbers that someone had to find the winning combination and Brad turned out to be the one that doesn't mean Brad has any predictive powers. He was lucky. The same goes for Wall Street, at any given time there are so many people making predictions that virtually anything the market can do in a given period of time has almost by definition been predicted and some person is going to be right. it means they have predictive abilities, it just means they got the lottery numbers so you can't time the market and if you try to time the market it will make you cry, you mentioned this spring and it's a great example that I've had for years.

I've been preaching the fact that you can't time the market. I have no idea what the market is doing right now. I don't know what will happen tomorrow. I don't know what will happen to you now at the end of the year or what will happen. I will do it next year with pretty significant confidence in 20 years, I could say it will increase substantially even in 10 years because I have a history to back it up, but in the short term the market is very volatile, very unpredictable, so last spring came greed. It comes out of nowhere and the market immediately tanks and I'm on Twitter, I'm on Facebook, I'm on my blog saying the same thing, I don't know what's going to happen next, you know, and I think the market in terms of the loss around 32 33, there were a lot of people commenting on my social media on my blog saying Jim, this time it's different, this time it's a pandemic, this time it's you know all the reasons why it's different and I said, well, you got it. knowledge I don't have, I even posted on Twitter at one point, I discovered a new symptom of coveted clairvoyance because it seemed like everyone around me knew exactly what was going to do well in the market.

It is often said that Mr. Market will do exactly whatever it takes to embarrass the most people, so of course the market immediately took a sharp turn and never looked back. Did you know that was going to happen? No, I mean, when the mark went down to 32 percent, it was saying it could go down another 32 it could turn around and go back up it could bounce back nobody knows and the most important thing to understand when you start investing is that you have to maintain course and if they throw you out every time you get scared because you think the market is going to go down, you're going to lose, the markets are volatile, hey, the market will go down the moment you own it, it's like living in New England and being surprised when it snows, I mean, and the way the blizzard does it.

It doesn't last forever, it can be miserable, it can be hard to live with, but just like a market crash, it doesn't last forever. The sunny days come back, it's like living in Florida and being surprised if there is a hurricane, that's part of living in Florida. Does that mean hurricanes aren't scary? No, does that mean they cause no harm? Doesn't that mean you shouldn't be surprised? Yes, you should not be surprised and the hurricane will pass. It's the same with the market. Dont do it. you know when the storms are coming, you know ultimately the thing to do is stay the course and a lot of what we talk about about investing is this psychological aspect, when you're trying to time the market, you're trying and I'm not. saying this clearly as a good thing, but people try to time the market, they try to say oh I think it's going to do this and oh I should invest more money or I should just wait until it gets to this point and your point.

Nobody can time the market, you can't, you're lucky to get it right once, but you have to get it right on both sides, the buying and the selling, which is practically impossible, so it's really silly, but we. You shouldn't discount the psychological aspect of when you see a 32 33 drop, and as you said, you should expect it occasionally, certainly, throughout your investing life, but that doesn't mean it's not painful, it doesn't mean you don't do it. You don't have to be robbed by this inevitability and I guess my question to you is that you've been through a lot of these experiences throughout your life as an investor, how did you personally react, if at all, and that might be the answer. ?

Answer also like just internally, it's not that I hope you sold things clearly, that's not what I'm talking about the psychological aspect when March came and it dropped 30 percent of what was going on in your mind at the time, so I think. I don't think this is what was going through my mind at the time, but this general question, Brad, might be the most important thing we talked about today. I've written it and I think it's in my book, it's certainly on my blog. I have written that no one should follow my advice until they are absolutely clear that they will not sell when the market falls, they will not sell in panic because if you do, you are not absolutely sure about that and you sell when the market falls and you panic, which, As you just pointed out, it's a very natural reaction.

Market crashes are very scary. My advice will leave you bleeding on the side of the road. Any investment advice will leave you bleeding on the side of the road. So work first. Before you follow the simple path to wealth as I describe it, you need to make sure you have the right mind and know that selling is not an option when the time comes because you know that these dips, although they are scary and terrifying and it is horrible to look at your portfolio and see that it has dropped 30 or 40 percent. It's also temporary, like hurricanes, when you're sitting above you and the winds are blowing and the windows are vibrating.

Isscary, but it will do it. happens and until you know not to follow my advice or any investment advice, now I often think to myself that something people can learn just by saying it by reading what I've written about it or you have to live one of these things and commit the mistake of selling deep down I had to live through it so in 1987 I mentioned that Black Monday came this is in the days before computers and online trading where there were actually stock brokers and that was Black Monday uh I was working, I had no idea what was going on in the market, it's not like you can check it on your computer like we do today and at the end of the day, just on a whim, I called Wayne, who was my stockbroker, and he He was kind of a friend, right?

I hadn't talked to Wayne in a while and then I randomly called him that day and he answered the phone and I was like man, how are you? and there was a long pause and he said, I'm kidding, right, and I said no, he said you don't know what happened today and I said no, he said, man, this has been the worst day of my life and He went on to tell me that the market had dropped 25, well I was horrified. That meant you knew he had 25 less money than before. Now he knew what was right.

I knew the right thing to do was to stay the course and in fact I did that for a month and then two months and then three months and after that initial drop the market continued to go lower and lower and lower and lower and finally I didn't have the strength, I didn't have the head right and I sold, I want to say three, maybe four months later and if that wasn't the exact day the market decided to turn around, it was that it was close enough that it didn't matter and then I sat on the sidelines for a year and watched the market march up and beyond where it had been.

On Black Monday, before it finally came in, that lesson stuck in my mind, so how did I feel in 2008? I was afraid, I mean, man, in 2008 2009, you know, in March of 2009, the market hit and this is something that people should think about before if. They have never been through a major crash this is what it looks like March 2009 the market hit bottom I mean it was 666 the biblical mark of the devil right what you have to understand is that no one knew that was the bottom at that time it was about a drop of 50, no one knew that was the bottom, all the smart people I was talking to at the time said it would drop another two thirds, so let's do it mentally, let's say you went into that crash with a million. two and by March 09 your million two is now six hundred thousand and everyone around you says it's about to hit two hundred thousand, this is what a really ugly market looks like and do you stay the course under those circumstances?

I'm not sure I could have done it if I hadn't had that experience in 1987. I'm not sure I could have done it based on knowing it intellectually without going through my gut, so that's one of the things I worry about with my readers. because the markets, aside from this march, since I wrote my blog have done nothing but go up, but you have to be prepared for those heartbreaking and heartbreaking changes. Now the other thing you asked is how I felt. in March I didn't even phase a little bit I didn't even think about it uh you know now I look back and say I wish I would have moved some bonds they should have been rebalanced uh okay yeah so this is this is great and I think the other thing I wanted to go to is actually go back to self-cleansing a little bit because I don't think people are as intuitive as I don't think people realize how powerful that actually is, so let's represent a real scenario here: scenario where one person invests in straight winners, he has chosen some companies that have been rock solid for the last 10 years and these companies are absolutely crushing and they own the actual shares in which the other individual has invested as a total stock market index fund for the last 10 years and they've had a good run too, you know, maybe they haven't risen as high as these others, but they own the same companies within the index fund.

Now what happens is the index fund is cap-weighted and you said that in passing, but to people that means that in your total stock market index fund you own a disproportionate percentage of the most valuable, largest-cap companies. of market and we know what they are these would be facebook amazon apple microsoft netflix now tesla you know that these types of technology companies are going to disproportionately occupy the top now here's the hypothetical here and I just want to compare and contrast and I would love for you to interpret it a little bit Hey, do you know what self-cleaning means?

In this context, we enter the new year and some type of antitrust legislation is enacted or maybe something else, I don't know who knows. What is just one of these massive companies or several of these massive companies or any unknown thing that happens and these companies that represent a large percentage, a huge percentage and, like Brad, we looked up the other day, what are the five or ten main? companies offset each other in terms of holdings in a vt sax fund yeah I think it was about a quarter I think when we looked at the s p 500 it was about 30 maybe a little bit less and I think it's about a quarter , but I can, uh, I can contact you if it's markedly different, no, no, okay, so like 20, we said 20 companies represent 30 of your holdings in an smp 500 phone, it was something like that, okay, that It sounds good to me.

Great, okay, in this example, this guy owns this entire stock market fund, so 30 of his net worth is invested in a small group of companies disproportionately in the technology sector. Something really bad happens and some of these companies disappear. smashed from 50, break away, maybe go to zero, obviously some kind of black swan event like that would be pretty demoralizing for any of these investors, but I'm curious to get your take on the self-cleaning approach that would occur in the inside. of a total stock market index fund versus the stock investor who just directly bought these companies and watched it go to zero, what the difference would be there and just play around with that a little bit, that's cool. question so one of the criticisms of index funds is just what you were talking about so they will look at vtsax today and the last few years and say you know essentially because it is cap weighted like you described and the companies most big.

They are a very large percentage of the total portfolio, you are buying a fund with a lot of technology, you know that you are really betting on technology and today that is true, but what is lost when looking at it today is the fact that it was not always true, You know? In the past, the index has been dominated by financial companies, it has been dominated by energy companies and that's what self-cleans, because any company that gets to the top goes to the top of the index and you own more in any sector, whether it's technology or energy or finance or real estate or whatever the sector is, if you're going to have your moment of success, you're going to rise to the top of your index and you're going to own it as it's rising, just like you own the technology that is increasing now to At some point, I have no idea when, at some point, I guess the technology will fade away and it might be replaced by something else on top, that's an advantage that's part of the self-cleaning process and its hypothetical proprietary investor says that.

The top 10 tech stocks and you're just going to hold them will be badly hurt in that process because you'll get the fade-out effect without new companies taking their place. Now, to be clear, anyone who bought the 10 largest tech companies in the world. 500 or the entire stock market today has greatly outperformed, but they were very lucky to pick the right sector, the right companies because there are a lot of technology companies that didn't work out and are now vulnerable to this fade-out effect, let me. I give you an ex, two examples to illustrate this when I was young and we were showing the dinosaurs out of the way around 1968. 1970, someone came up with the concept of what they called the nifty 50. and the idea was that they would look at the 50 most successful publicly traded companies in the United States at that time and said he knows what these blue-chip companies are.

If he buys these 50 companies, he can buy them and forget about them because they will give him a great return. the decades well, of course, there were no teslas in those 50s. there was no amazon, there is no microsofts, there are no oracles, there was no facebook there, you know, they were companies like uh kodak like general motors, I mean, these were the stars While they were the most powerful companies of their time, they are not the most powerful companies of today and the most powerful companies of today will not be the most powerful companies decades from now.

I liked to tell people you know yes. The Dow index, which is the most popular, now consists of 30 companies that started in 1880, 1890, something like that, it had 18 companies and I would like to say how many of those 18 companies do you think are still in the Dow 30 today. It used to be a well, it used to be one, it was General Electric and about two years ago, General Electric fizzled out, so now the Dow Jones Industrial Average doesn't have companies that were there originally, that's a bad thing, no, it just means that the sun. The companies of the late 1800s were not the dominant companies of the late 1900s or early 2000s, so this process of self-cleaning and, again, being very proud of that term is such a powerful part of owning the index because you always will. , you will never have to worry. about what's fading and what's rising because you'll always be there, so wow, this, we've spent about an hour, almost an hour and a half here, and each of the questions was really a little bit better question. best version of a question we asked in episode 19 I think the information we covered is timely I think it's necessary I think it's vital for someone starting out on the journey to be aware of this as a strategy to get started, I think it eliminates a lot of the fear and I think you're doing a great service to this community and the world by sharing this approach because it makes sense some things when you see it you say, yes, that's what makes sense, that's right, it's unassailable because it's true, that's how it has worked and how it will work in the future, uh, jail.

I'd love to invite you to join us again sometime over the next few months to continue the conversation and expand this to other asset classes and other strategies, so we'd talk about maybe the role of bonds and a smoothing portfolio. the path, as I know you've mentioned in the past and we've also talked about buildup, but what does it mean? decumulation What does reduction look like to you? Would you like to return to the show at some point in the near future? I would love to, I love hanging out with you guys, by the way, congratulations on the amazing platform. that you've created and the amazing service you provide to the community, so any time I can add value, I'm happy to hang out with you.

I always have a good time, so why aren't they nice? Okay, everyone, so let me. Obviously we talked about the book The Simple Way Wealth You can wait until the next episode, but I encourage you to make it a good time to read this content and realize that it has always worked and that is how it will be. the best chance, you know, if you want to have the best chance of success, stop trying to win the game, stop trying to win the game and just realize that it's time to be in the market, not time the market and that you can earn over time. just keeping it simple check out this book the simple path to wealth you can find it its very easy to find on jl website just visit jlcollinsnh.com jlcollinsnh.com there is a banner on the right side to get a copy of the book and let them know leave them a review let them know you appreciate it let them know it was helpful give them your opinion on this episode we are very grateful for their time in prison thanks again for coming on the show today it's a pleasure for me, thank you Because of the invitation, I'm already looking forward to the next time.

Alright everyone, I'm really excited about how this episode came together. It's time and honestly you could listen to the original episode 19 that we did, it's probably worth it and still. get incredible value from this episode, it's timely, it's meaningful and I think it's very important information, listen to it, take action on it, share it with friends and family. A lot of things have been taken away from a lot of people this year and I think In a world of uncertainty, simple information like this can really make a difference. Alright, my friends, the fire is spreading. See you next time as we continue down the road less traveled.