The Simple Path to Wealth by JL Collins – Summary

The Simple Path to wealth by JL Collins is a book intended for his daughter. He did not wants his daughter to make the same mistakes he did. He wanted to give his daughter something that help her accumulate FU money. AKA financial freedom.

This is great book, it’s also a long book. I’ll do my best so summary and simplified base on my understanding and opinion.

Everything on this book is found at his blog stock series. I still recommend reading the book, since its being organized and compartmentalized. Most blogs are a series of disorganize blog post. Even though his done a great job on his blog, The book simplified things so that anyone can understand.

There are two portfolios or main stages to achieving financial freedom. The wealth accumulation stage and the wealth preservation stage.

The wealth accumulation stage

In the wealth accumulation stage you just build wealth. You put your money into 100% stocks. Index funds stocks. You buy and hold. If you get a check every two weeks, then every two weeks you buy stocks. You do it automatically and consistently.

Understand that the stock market will go down. You never sell in a panic. If you sell , you lose. So buy and hold. No emotions involve. Understand that the stock market always goes up and down. But in the long run price goes up.

When the stock market goes down, it’s in a bear market so the price of stock shares are cheaper to buy. It’s like buying things on discount because you can buy more shares.

When you start investing. Invest in broad and low cost index funds. Like in the total us stock Market (VTSAX). If you live outside of the US then you can invest in the total global stock market.

Don’t pick individual stocks. Most like you are not going to out perform the the market. The adds are against you with individual stocks. Some people think that they can do the same thing or duplicate warren Buffett strategy.

But think what percentage of the population has the investing skills that Warren Buffett has? He is one of the people with the best investment skills in the entire world. Yet he had said that he can’t time the market. Therefore, The chance of you timing the market are slim, the odds are against you.

Same thing applies to people that manage active funds. Most active manage funds do not out perform the market. So you paying for fees so someone can mange your money.

It’s better if you learn the basics and you manage your money. This will be more profitable and simple.

The wealth preservation stage

In the wealth Preservation stage you switch from 100% stock to 75% stocks, 20% bonds , 5% cash and 4% withdrawal rate.

The wealth preservation stage is when you have achieve financial freedom. When you work because you want to not because you have to. This is when can live off the interest your portfolio generate. This is when your assets passive income is equal or greater than your total lifestyle expenses.

Why 4% withdrawal rate?

This has to do with generational wealth and preservation and protection of capital. So you can live till the day you died without running out of money. And once you not longer with us, the money goes to your love ones.

You can find out the 4% withdraw rate. in two ways.

one way,

If you total living expenses are 50,000 per year then you multiply 25×50,000 = 1,250,000

If you total living expenses is 13,000 per year then you multiply 25×13,000 = 325,000

the second way,

With the same samples,

If you have $1,250,000 then you just multiply by 0.04. Therefore, 1,250,000×0.04 = 50,000

If you have $325,000 then you just multiply by 0.04. Therefore, 325,000×0.04 = 13,000

Why 5% cash?

In a down markets, there could be emergencies expenses or short term expenses. You use the cash to prevent forced sale of investments. You can keep the liquid cash in a money market account or a high-yield savings account.

Why 20% bonds?

You use 20% bonds as a risk management. Like vanguard total bond market( VBTLX).

If you live outside the US, you may check vanguard global bond index funds.

Why 75% stocks?

Most of your wealth will come from the grow and compounding of stocks. I think that is just an opinion, you can use different percentage.

Asset reallocation.

When stock goes down , bonds goes up.

When bonds goes down, stocks goes up.

Example

Image you have portfolio of 65% stock and 35% bonds

If stocks plummets, The price of bonds goes up, so you sell some of these bonds and invest it into stocks. Remember, buy low and sell high.

If bonds plummets, the price of stocks goes up, so you sell some of these stocks, and invest it into bonds. remember, buy low and sell high.

Remember and don’t forget that you are suppose to buy on bear/down market when the price is low. and you are suppose to sell in a bull/up market when the price is high.

With these two strategy you not longer have to worry whether the market is going up or down. because you already know that in the long run, over time, the market is going up. With the buy/sell stock and bonds you have eliminated your concern with volatility.

The really smart people that spend all the time investing. They use volatility to calculate risk. But for us, lets keep this simple.

For us, volatility aka risk.

So once again, never sell on panic, just because the market went down. Selling is not an option. If you sell on a panic you lose.

Either use bonds or use cash flow to smooth the ride depending on what wealth stage bonds and stocks are in.

Time in the market is more powerful than timing the market.

This remind me of dollar cost averaging.

let’s continue.

You should separate the emotion from you investment. No matter how big is a company, the moment the company messed up, there will be other company waiting to to take its place. This bring us to owning a piece of the business.

You own a piece of the business!

With index funds, whether is the total market index funds or S&P 500. You don’t have to worry about which company is going to win or lose. The loser disappear and the winner keep going.

With individual stocks, if the company lose 100% of its value. You lost 100% of your stocks in that company.

With index funds, if company lose 100% of its value, or it’s approach to losing 100%, it just get delisted. and you just lose a small and tiny percentage of your portfolio. Example you just lose 1 of 500 companies in the S&P 500.

The great thing is that with an index funds, there are always going to be new companies with amazing people. This people will work extra hard to improve the company.

But we as investor, don’ t have to worry about any of that. Let them do the hard part. We just invest in all the companies.

If you live in the US should you invest internationally?

No , You should only invest in the us index funds. To my understanding this is his opinion. There are people that do not agree with this.

I think that one of his argument is that Large cap US companies are inherently international by nature. Since they do business all over the world.

For example,

Google is an American company that do business all over the world.

What’s is Not an investment

Investment are things like stocks, bonds, mutual funds.

Some people confuse Roth IRA, 401k,TSP plan and similar others. These are not investments. You should look at these as buckets. They are buckets where you hold your investments.

Expense ratios

Expense ratio of an asset is the total % of assets used for managing, advertising, administrative, and to make it short, think of all other expenses. This is the expenses necessary to run the funds.

This is the fee you pay for using the services.

The index funds expenses ration is really low, like 0.04. It varies depending of what kind of company you are using.

The best expense ratio is 0. Some companies offer 0 expense ration.

Where to invest my money?

VTSAX – Vanguard total Stock Market Index fund. Is Recommended.

VBTLX – Vanguard Total Bond market index fund. Is recommended

Mistake people Makes!

We already went over this, but is a good reminder.

One of the mistake people make is thinking that they can pick individual stocks.

Another of the mistake people make is thinking that you can pick someone that can pick individual stocks. Like the people that manage actives funds. Like people that run active manage mutual funds.

Other is, when people try to time the market. The true is that no one can predict the future.

Where is JL Collins blog?

Click the link to be taken his blog.

Final thoughts

Focus on two simple portfolios. Wealth accumulation and wealth preservation.

My small summary review don’t really do justice to the book. I hope this give you an overall understanding.

Now, Just start and adjust as you go.