JL Collins Part 2

The transcription is a conversation about investing and financial independence. The speaker discusses the importance of staying the course during market downturns and not selling out of investments. They also recommend investing in index funds, particularly the Vanguard Total Stock Market Index Fund (VTSAX). They also mention the benefits of dollar-cost averaging and the potential advantages of investing in international funds. The speaker concludes by discussing the pros and cons of lump sum investing versus dollar-cost averaging with a lump sum. Welcome to this guided meditation for your journey to financial freedom. Let's begin. Find a comfortable place to sit. Breathe in and out. In and out. You may be working on building your wealth with regular investments into VTSAX or a similar total stock market index fund. Or perhaps you are retired and have a portfolio balanced between VTSAX and VBTLX or a similar total bond market index fund to smooth the ride. Now the stock market has taken a dip. Or perhaps it has dropped about 20% into what is called bear market territory. Or perhaps it has even crashed further. Or you are worried it will. For the purposes of our time together, let's assume it has. Relax. Focus on the sound of my voice. Everything is going to be alright. Hi and welcome to Catching Up to Five, a podcast on mindset, money, life on the journey to financial independence. I'm Bill and I'm a late starter. Hi, Becky, and I'm also a late starter. And we're your hosts. We're here to help you with your journey to financial independence no matter where you're starting from. We're going to talk to other late starters, experts, and we'll explore topics related to our mission. Join us as we catch up to five together. You give Mike Tyson a hard time. You also, you know. Don't remember Mike. You also refer to us as cupcakes. And you mentioned that we have to be tied to the mast. How do we steel ourselves against this? If I'm remembering correctly, you made this mistake just like I did at the Great Recession in 1987 and Black Monday. I don't know if people know this, but I think you sold out. You're absolutely right. And one of my, and I'll tell that story in a second, Bill, and I appreciate you bringing it up. But one of my concerns with my writing is that it's very easy to say you have to tie yourself to the mast. But I wonder, can people really do that just being told, just reading that that's the right thing to do? Because when the market crashes, it's, make no mistake, it's pretty terrifying. And it takes a lot of fortitude to stay the course. And I'm not sure that maybe you don't have to live through one of those crashes and make the mistake of selling out and then turn around and watch the market rebound without you. So in 1987, that was Black Monday. Again, the single largest daily drop in the market's history, bar none, I mean, including the Great Depression. This was before computers and cell phones and all this kind of stuff. I happened to call my broker at the end of that day just because I hadn't talked to Wayne at the time. This was also in the days when people had brokers. And, you know, I'm in a pretty good mood and I'm cheerful. And I, hey, Wayne, how's it going? And there's this pause on the phone. And he said, you're joking, right? And I said, no. He said, man, this has been the worst day of my life. And he proceeded to tell me that, you know, the market had plunged, I think, 26% in that day. He said, I've had people calling me all day yelling at me. And nobody knows where it's going from here. And that was the first I'd heard of it. And I knew what the right thing to do was. I knew the right thing was to stay the course and do nothing. And initially that's what I did. And then the market continued to kind of drift down and drift down. It wasn't as dramatic as that Black Monday, but it kept grinding down and grinding down. And this was, I want to say, and correct me, Bill, if your memory is better than mine, this was in September that Black Monday happened. I think it was October. October. My birthday month. Yeah, so it was October. Anyway, by, you know, I held out for, you know, two and a half, three months. And finally in December I just gave up. I threw in the towel and I sold and went to cash. And if I didn't sell at the absolute bottom, it was close enough that it didn't matter because shortly after I sold, the market began to slowly grind its way back up. And by the time we got to the anniversary of that day, the market had recovered all of its losses and then some, and I'm still sitting on the sidelines. So now all I've done is locked in my losses. And, you know, I keep waiting for the market to plunge again because in those days I'm paying too much attention to what's being said on TV. And, of course, people are still predicting, oh, you know, it's going to go back down again. And so, but I finally got back in. But that's how I learned. And that's what gave me, frankly, the fortitude when the much worse event of 2008 and 2009 happened. And, you know, make no mistake, I was, you know, I was nervous too. But I stayed the course. And I don't know that I would have stayed the course if I hadn't had that 87 experience because at least for me, and hopefully people listening are made of sterner stuff than I am, but at least for me, knowing what the right thing to do was not enough in 87. I had to go through the pain of making the mistake before I had stern enough stuff to not make that mistake again. What can we do, J.L., when the stock market goes down? I mean, is there any advantage to us in those times? Well, there's a tremendous advantage, especially if you're creating wealth. So, first of all, the first thing to do is to do nothing. Don't sell. If you're set up like my daughter is and like you should be with a regular investment program where you are taking a portion of your income and putting in the market, you absolutely want to continue to do that. In fact, if there is a way you can free up more capital to take advantage of the fact that the market is down, that's a great thing to do. If you're young and starting out, or regardless of what age you're starting out at, and you're trying to accumulate wealth, the very best thing that can happen for you is a major stock market crash because now you're in a position to buy all of these things at a steep discount. Now, of course, you have to have the fortitude to be willing to buy when everybody else is panicking and saying sell. And it's like Warren Buffett says, you know, you want to be greedy when people are fearful and fearful when people are greedy. But if you can bring yourself to do that, I mean, market drops are a wonderful time to accumulate shares. Now, I don't recommend waiting for market drops to do that because you should be accumulating shares all the time. Because if we look at today, for instance, and I was just looking at an article that was pointing out that the market is now up 20% from the last low that it hit. And so technically it's been a bull market. So people might say, well, I don't want to buy now because the market's back up again. Well, we don't know. At this level today, this might be the lowest the market will ever be again in our lifetimes. I'm not saying that's the case. What I'm saying is we don't know. So this might be the best buying opportunity. So you never want to stop your accumulation, but you certainly don't want to stop it if you're fortunate enough to have the market drop. So market drops, if you have the right attitude and you have the fortitude, can be a wonderful boon to your long-term investment returns. I think the reason you give Mike Tyson a hard time is because he said something along the lines of you don't have a plan until you get punched in the face. And unless you have a plan, you will get punched in the face and you've got to have the fortitude to stick to that plan. You know, we have the media saying sell, sell, sell. Why don't they say buy, buy, buy? You know, we're running out of target instead of running in at these sales. Like people will do it for Best Buy at Christmas, but they won't do it for the stock market. Well, I think to answer a question about the media, I think a couple of things. One is that fear sells papers, or in this case, of course, newspapers are gone. But, you know, fear attracts eyeballs. So if, you know, that's why you won't see CNBC inviting me on when the market crashes to say it's not a problem. Don't worry about it, you know. And the other thing is, as we talked about, those programs are all focused on the short term. And if the market's crashing and you're a short-term speculator, that your hair is on fire. I mean, you should be panicking because, you know, you're getting your tail handed to you. But if you're looking out 10, 20 years, then none of that short-term stuff matters other than as we – Becky and I were chatting about a moment ago, it might be a unique opportunity to acquire more shares. Let's say you're putting $500 a month into the market. Well, your $500, when the market's down, is going to buy you more shares. By the way, that's another way to – that's another mind – way to organize your mind to think about this stuff when the market's down is that the price of those shares might drop, but you still own the same number of shares. The number of shares you have has not changed. So if you can add to that pile of shares at a lower price, then when the market turns around and the price of those shares go back up, you'll be doing just fine. We've talked about index funds and VTSAX. So what is your recommendation for someone who wants to invest and do it in a simple manner? VTSAX? Index funds. Yeah, I think that the tool to it – you know, the complexity around investment or the difficulty around investment is not in the tool. I mean, the tool is the soul of simplicity. In fact, so one of the – you know, occasionally I get criticism on the simple path to wealth and, you know, people say, well, I can sum that book up in one sentence and buy VTSAX. And they're not wrong. I mean, you know, that's not wrong at all, but understanding why you should invest it and adapting the right mental frame of mind, as we've just been discussing, are kind of the keys. And when I say VTSAX, that's Vanguard's Total Stock Market Index Fund. But to be clear, and I have a preference for Vanguard for reasons we can discuss if you like, but to be clear, if you're with Fidelity, their Total Stock Market Index Fund is fine. If you're with T. Rowe Price or Schwab or anybody who has a Total Stock Market Index Fund that is low cost, and almost by definition they all are, that's fine. By extension, if your 401K doesn't offer a Total Stock Market Index Fund, but it offers a S&P 500 Index Fund, that too is fine because the Total Stock Market Fund is cap-weighted, which means that it's tilted towards the largest companies. So VTSAX is about 80% of the S&P 500 anyway. So the fact that it's got a little mid-cap, a little small cap is sort of like adding Tabasco to your food. It's a little extra spice that I like. But Jack Bogle himself, Jack Bogle of course being the founder of Vanguard and the creator of the first retail index fund, which was an S&P 500 Index Fund, he held that until his death, and I think Jack did just fine. So I have no objection to S&P 500 funds. What you want is a low-cost, broad-based index fund. So not everybody believes purely in VTSAX. There's the issue of diversification in international funds. For example, you mention in your book too that it could be perfectly fine to invest in VTWAX, which is a total world index fund. Do you think there's a time that it's better to do that than just invest in the U.S. economy, where you have home-country bias? So great question. When I'm talking to people overseas, you know, when I travel internationally and sometimes I'm asked to talk to people who don't live in the United States, the World Fund is what I recommend to them. The United States is the only country where it's large enough that you can get away with that home-country bias. So if I'm talking to any other group anywhere else in the world, you know, I would be uncomfortable suggesting that they invest in a country other than their own completely, i.e., the United States. Plus, I think the world is going to move in that direction anyway. So what I say to my daughter is the U.S. is the dominant economy at the moment. I think that is going to continue for the time being, but it is changing. If you go back to the end of World War II, the United States was the only developed country that wasn't in ashes. And so not surprisingly, the United States essentially was the world economy in those days, almost 100%. And so a very large percentage of a somewhat small pie. And then Europe and Asia began to rebuild out of the ashes, and with a lot of help from the United States, which was enlightened self-interest on the part of our country. And as those countries began to redevelop, well, their share of the pie began to get bigger. And, of course, that came at the expense of the United States. Sounds like a bad thing until you realize that the pie itself is getting bigger. And while the U.S. percentage is shrinking, the overall pie is getting big enough that it is – we are better off in the United States. That is a process that has continued for the last 75 years. And I think it will continue to – it will continue down that road as the rest of the world continues to grow and prosper. Again, I think that's a good thing for the United States. At some point, the United States will be a small enough part of the pie that even for Americans, they might be better served going to the World Fund. And that's one of the reasons that if somebody is interested in owning international funds, while I don't see the need for it at this point, I certainly don't object to it. If somebody were to say, you know, I think the time is now I'm going to go to that World Fund, I'm not sure I'm there yet, but I don't – I wouldn't object to it. I think you might be anyway doing that, in my judgment, is probably a little bit ahead of the curve. But I think that that's where the curve is going. So that's one of the few things I tell my daughter that she probably needs to pay a little bit of attention to, other than setting it and forgetting it. I actually myself invest in BTWX for that reason because I like to think I'm a contrarian investor with P-E ratios being as they are, and I feel like I'm buying international stocks on sale. How do you feel about that as a contrarian approach? You know, I think it's interesting, and I think your thought process is spot on. So I have no disagreement with that. You know, you are – I'm not doing that. I'm still in BTSAX. So you and I are both making our best guess as to what, say, the next 10 years holds. And hopefully 10 years from now we'll be sitting around with a cup of coffee, and one of us will have won that race. But it could just as likely be you for the reasons that you mentioned. I mean, right now on a P basis, you know, U.S. stocks look expensive, and international stocks look like a bargain. I happen to think that there are reasons that U.S. stocks are carrying that premium that are going to continue for a while. Your analysis is a little different, and you know what? I could easily see you being correct in 10 years. But I could also almost guarantee that both of us will be much wealthier by virtue of holding these things in 10 years than we are today. So it's not like one of us is going to lose. It's just one of us will be a slightly bigger winner. We have a question from one of our community members, Joanne, and she asks, is there any other index funds he would be recommending today? Well, again, thanks for the question, Joanne. I would say, as I already did, any total stock market index fund from any broker is fine. Any S&P 500 index fund from any broker is fine. If we're talking about stock funds, those are the only ones I recommend. If she's asking are there some sort of sector funds I would recommend, I get that question occasionally. Would I recommend an index fund in the tech sector or in the banking sector or whatever sector somebody thinks is going to do well? That, again, for me, falls into speculation. So, yeah, those are the extent of my recommendations. Actually, you do speculate a little bit because you still have a penchant for playing with individual stocks with your play money, and what do you mean by that, play money? Well, so first of all, I haven't owned an individual stock. I'm trying to remember the last time, but, you know, it's got to be 2013, 2014, 2015. You know, 2013, 2014, 2015 was when I finally unloaded the last one. You know, my transition to indexing, you know, it wasn't a road to Damascus kind of event. It was a gradual thing, and I frequently joke that I have the disease. I mean, I was a stock picker for decades, and there are few things that are more intoxicating in life than finding a company, doing your analysis, saying I think this is going to work, buying the stock, and having it work. I mean, that's very intoxicating. So it's an addiction, and it's, you know, I have the disease, but for the last, you know, eight years, I'm going to say, I've been on the wagon successfully, and every now and again I get tempted, but, yeah, I don't go there anymore. Well, it's good to know. You talk about investing over the long term and, you know, investing into your 401K every paycheck. This is actually a bit of dollar-cost averaging, which I guess you're not a fan of with regards to lump sum investing. Can you tell us what dollar-cost averaging is and why you're not a fan of doing that with a lump sum? Yeah, so it's when I wrote a post about dollar-cost averaging, and when I wrote the post, I neglected to think about the fact that there is lump sum dollar-cost averaging, which is what my post was about, but there's also dollar-cost averaging that simply comes from your cash flow. So if you have a job and you are diverting a certain portion of your income into investing into your 401K and hopefully you're maxing that out and then into a taxable account because hopefully your savings rate is high enough to afford for that, that also is a kind of dollar-cost averaging, and I'm very much in favor of that. As we talked about earlier, that's one of the ways that you take advantage of the inevitable market declines. But when it comes to a lump sum, let's suppose that you sell an asset and wind up with a bunch of money or you have an inheritance or however a big chunk of money comes to you. The debate is, to make the math easy, let's say you get $120,000. Another question becomes, well, do I put all $120,000 into the market today, or do I say, you know what, I'm going to put $10,000 a month in for the next year? And the appeal of doing that, that's the dollar-cost averaging, is that if you put it all in today, there is a chance that tomorrow will be the day that the market plunges 40%. This is, we already talked about, periodically the market does crash, and it could crash the day after you put your $120,000 into it, and that obviously would be a very bad day. If you're dollar-cost averaging, you say, well, that's only $10,000, and then I have the advantage of putting in the rest of my money at these lower rates. So that's the allure. So why don't I like it? Well, I don't like it for a couple of reasons. Number one, mathematically, the odds are against you. So the market goes up, on average, three out of four years. Now, obviously, it doesn't go up three years and then down a year. That would be way too easy. But on average, the market's going up 75% of the time and down 25% of the time. So what that means is if you're dollar-cost averaging over the course of that year, that you have a 75% chance of doing less well than if you just invested it all at once. Because if the market's rising while you're doing that, all you're doing is paying more money for your shares each month. If the market's flat while you're doing that, well, you're spending the same amount of money for your shares, maybe, but you're not invested as early, and so you lose that benefit. The only time the dollar-cost averaging benefits you is if you happen to be in that 25% time where the market's actually dropping. And in that case, dollar-cost averaging is going to be the winning strategy. So you have to ask yourself, as with any wager that you're making, do I bet where the odds are 75% in my favor or where they're 25% in my favor? Well, to me, I'm going to go with the 75% every time. But here's the real kicker. Let's suppose that you say, no, I just don't want to take the risk of that market plunging the day after I put my money in. It just feels more comfortable to me to dollar-cost average it, and that's what I'm going to do. So you do that, and you start in January, and then December, you make your last investment in your dollar-cost averaging strategy, and now your 120 is fully deployed. And the next day is the day the market drops 40%. So dollar-cost averaging really hasn't protected you from that risk at all. In fact, this is an important thing to remember outside of dollar-cost averaging. Whenever you are invested, every day there is that potential that you'll wake up tomorrow and your portfolio will have dropped by 40%. That's part of the volatility we've already talked about, part of the reason you have to tie yourself to the mask. So the idea of trying to avoid that with dollar-cost averaging, especially when it's only going to work in your favor 25% of the time, that just doesn't make any sense to me. Okay. We haven't talked as much about bonds. And given today's interest rates and last year for bonds, do you still recommend the Total U.S. Bond Market Fund or would it be as an intermediate-duration fund? Would it be better to be in government treasuries in sort of a barbell fashion with short-term treasuries and some intermediate treasuries? I wonder a little bit about your approach to bonds because of what's happening and the interest rate risk associated with your recommendation. Can you speak to that a little bit? So the nature of your question is it's the question of a speculator because, as you said, I wonder because of what's happening with bonds at the moment. And I'm not thinking about bonds at the moment. I'm thinking about it as part of the ongoing strategy. So the short answer to the question is no. If you're going to have bonds, I think the Total Bond Market Index Fund, which owns all kinds of bonds but is, in effect, an intermediate-term bond fund because the short-term bonds offset the long-term bonds and what have you, I think that's a good place to be. Now why do you own bonds? Well, first of all, in my strategy, for a lot of your wealth accumulation years, you're not going to own bonds. My daughter doesn't own bonds. And why doesn't she own bonds? Because she has a job, and her cash flow from her job, the portion of it that's going into her VTSX account, is what smooths the ride. It's what allows her to take advantage of those declines that we talked about early on. You add bonds to your portfolio, in my world, when you no longer have that outside income flowing in because now the bonds take over for that income that's not there anymore, has ballast on your portfolio. So now the bonds are what smooth the ride for you when the market takes its inevitable decline. Bonds are never going to long-term outperform stocks. So whenever you add bonds, you are basically trading long-term performance for smoothing out the volatility and for having dry powder for when the market plunges and you can take advantage of those lower prices. So I'm not looking at bonds or the kind of return they can provide. That's just a nice benefit when it happens. In fact, I wrote a post, again, probably in the 2015 range, called The Bond Experiment or Stepping Away from the Bond Experiment or something. That's where I looked into other kinds of bond investments that might give me a better return. And what I determined for myself and I think for this strategy is that that might be possible with a lot of work. It's very much like short-term speculation. And it's also asking bonds to do something that I don't think bonds are particularly well-suited to do, which is to seek performance. If I want to enhance the performance of my portfolio, I'm simply going to increase the percentage of my portfolio that is in stocks rather than try to seek it from the bond portion of my portfolio. Does that make any sense at all? Absolutely. Absolutely. We just needed to speak to that because I don't have the fortitude to be 100% in stocks, especially at age 50. And our audience wonders, really, you know, what is different in their time of life if you start at 40 or 50? Is there any real difference? Should you have a different allocation? Our superpower tends to be savings rate over expected returns because we can't take back time. So, I'm sorry, I lost the question in your comment. Should we have – what kind of allocation should we have as late starters, say, at age 40 or 50? Should it be the same or would you hedge your bets a little bit more given an age factor, especially if you're wanting to retire, say, in 10 to 15 years? So, I'm not sure age is the factor that I would consider in making that decision. I think the factors that I would look at would depend on how close are you shaving it. By that, I mean wherever you're starting, you have to look at, okay, where am I starting and how long do I have before I'm going to be living on this portfolio, and how big a margin of error do I have? The tighter that is, the less margin of error you have, probably the more conservative you want to be. And when I say conservative, think more bonds to the percentage of stocks. But I also think it's a mistake to think about your money only in terms of your life, which is how most writers in the financial world talk about it. I think about my investments far beyond my own lifespan because they will continue after I'm gone. So, I'm not concerned just about how they perform in my life. So, my personal allocation is 80% stocks, 20% bonds, which is very aggressive by most measures. It's aggressive because I want the extra performance that stocks will give. Because, again, I'm thinking beyond my own, if I were only thinking of my lifespan, especially at this point in my life, I might be looking at it differently. But also because I have a pretty big margin of error. I have more than I need, so I can afford to take that risk. There are people, by the way, who would say, well, when you won the game, why would you be in stocks at all? You should get very, very conservative. I'm drawing a blank on the guy anyway. There was a great example of that today, Ross Perot. Maybe some of our listeners, we have an older listening group from what you've said, so people should remember Ross Perot was a billionaire and famously went into 100% treasuries. He figured that he'd won the game. Well, my attitude is I'm not a billionaire by any stretch of the imagination, but I've kind of won the game, and that means that I can afford to absorb more vol— I won't even say risk because I don't see stocks as being risky in the long term. But I can afford to absorb more volatility because I want my stock portfolio to continue to grow to benefit my heirs and the charities that it will go to. So the only other—so when you're looking at that balance between stocks and bonds, I think the thing you need to—a couple of things you need to keep in mind, number one, is that the more stocks you have, the heavier your tilt to stocks, the better your performance will be over time, and the more—the rougher the ride will be, the more volatile it will be. The more you add bonds, the smoother that ride will be over time, but the lower the performance will be. So at the end of 20 years, if you're tilted heavily towards stocks, you will probably have a lot more money than if you're heavily tilted towards bonds. But if you're heavily tilted towards bonds, you'll have had a much smoother ride. It's up to the individual as to which of those two things is more important and to which degree. The only last caveat that I would say about that is that if you're thinking about withdrawing based on something like the 4% rule, which comes out of the Trinity study or the research backing it does, it's important to remember that if you own less than 50% bonds, that 4% guideline begins to break down. It doesn't work so well. So I would caution people not to go below 50% in stocks. But other than that, I think it's a matter of what makes you most comfortable and meets your needs. We've talked about risk and return and stock index funds and bond index funds. Let's spend a few minutes talking about fees and the drag that that can have on your portfolio. I mean, that's a whole different little idea to think about. Yeah, it's an important one. So first of all, I recommend index funds because over time they outperform actively managed funds. And the research on this is pretty clear, and it's pretty dramatic. In fact, if you go out 30 years, I think it's less than 1% of actively managed funds outperform over a 30-period time. That's statistically zero. I think in any given year, index funds outperform 75% of them, something like that. So even from year one, your odds are heavily in your favor with index funds. And there are a lot of reasons for that. The main reason is that it is extraordinarily difficult to pick stocks that will outperform the overall market. But another reason, and it's not a small one, is that actively managed funds carry much higher fees. You know, the expense ratio, which is another way of saying fee, on VTSAX and broad-based index funds like it is like 0.04%. I mean, it's extraordinarily low. And active managed fund, and they've come down to meet the competition from index funds, but actively managed funds can be anywhere from half a percent to 2%. Well, that sounds low, but it's a huge drag over time. There are some – it's worth Googling this because some people have done some great posts, and I haven't done one myself, but showing just how extraordinary over time that drag is in terms of total dollars. But let's put it in another way that's maybe a little simpler. Let's suppose that you have a million dollars, and you're going to – that's your portfolio, and you're going to pull 4%, which is a pretty good guideline as to what a safe withdrawal rate is, out of that to live on. So that's $40,000 a year. But let's suppose that billion dollars has a 1% fee attached to it that comes out. Well, that's got to come out of your 4%. So that means that fee you're paying is now 25% of your potential income to live on. So instead of having $40,000 a year to live on, you're now at $30,000 to live on. So that might be the easiest shorthand to recognize how damaging fees are to your financial wealth. If fees got you greater results, you know, great enough to make up for their otherwise drag, that would be one thing. But the research pretty clearly indicates that they don't. So it's an extraordinarily important thing to look at, and it's a particularly important thing to look at for any of our listeners that are using an advisor, because that's one of my big criticisms of advisors. If you're using an advisor and they are not a fee-based advisor, which means you're not paying them an hourly rate, then the way they're getting paid is through fees and or commissions on what they put you in. And that means that their needs and your needs are not aligned. You hear the term – sorry, one more question – you hear the term assets under management or AUM. So can you describe that, like, just in case we've got folks in our audience that are just starting with their investment. So how do they evaluate these fees? Well, so sometimes it can be hard because the fees are kind of buried and disguised. But assets under management is – that's a way of – for an advisor to get paid. And to be clear, you know, they're doing a job. There's no reason they don't deserve to be paid. It's just you as the customer need to be very clear on how they're getting paid, and sometimes they're not as forthcoming as they should. But assets under management is usually however much of your money they're managing, they will take a certain annual percentage of that for their fee. One percent is pretty common. Two percent is not uncommon. And, again, if you think about our four percent kind of thing, you can begin to appreciate how expensive that is. So if you have a million-dollar portfolio, you know, that's how much that's costing you, but it's not going to be immediately apparent because you're not cutting them a check and sending it to them. Now, in fairness, when I talk to advisors, one of the things they will say to me is, well, you know, customers prefer the asset under management model. And, of course, they prefer it because psychologically they don't see the money going out of their portfolio, whereas if they're doing it on an hourly basis, a fee basis, where the advisor is charging them a certain amount an hour and they are writing a check and handing it to them, that's psychologically more painful for the customer. So the advisors in an interest, and this is where, you know, their interests are not necessarily aligned, the advisor is in a very interesting position because if they charge the way that is best for the customer, which would be hourly, they will have a harder time convincing the customer to pay that than if they just do the asset under management, take their percentage off the top in a way the customer never sees. And so the advisor will say, you know what, I'm just doing what the customer wants me to do. But that's a lot more expensive for you, the customer. So, again, it's a conversation that if you have an advisor, you ought to have with your advisor exactly how are you paying them and how much are you paying them. And if you don't like the answer to that question, then the next one is, of course, are they open to a different way of being paid that you might be more comfortable with? I wrote a post recently that kind of summarizes the simple path to wealth and sort of nine items that you want your daughter to understand. I'd like to go over a little bit just to remind our audience as we come to a close here what your primary recommendations are. Number one, avoid fiscally irresponsible people. Never marry one or otherwise give him access to your money. I firmly believe in that. Maybe we should do a wallet biopsy on those potential spouses so that we know if they have significant debt coming into the relationship. And maybe that would be a deal breaker. Who knows? You know, remember that I wrote this for my daughter, which is why I put him in there. So I don't mean to be biased against men. And because for the men in the audience, you know, if you marry the wrong woman, she will squander your money just as readily as if my daughter marries the wrong man. So, yeah, it's kind of interesting. We don't think about it. Marriage is usually an emotional thing or partners is usually emotional thing. We don't think about the fact that it's one of the biggest financial decisions we'll ever make. Well, I got one of the – you know, I get a lot of criticisms, as I guess anybody out in the – puts themselves out there does. And one of the ones I got was from a woman who said, you know, the moment I read that, I just knew that you had nothing to offer because, you know, marriage is not about money. I'm like, well, okay, good luck to you, but the truth is that financial issues are the single biggest source of conflict in marriage. So I stand by my comment. Yeah. And now number two is avoid money managers that we just talked about. No one will care for your money better than you. And, quote, advisors who put their clients' interests ahead of their own are, to steal a phrase from the edge of dark water, quote, rarer than baptized rattlesnakes. Isn't that a great quote? It's a great one. Yeah, you have a bunch of this. It's just the tongue-in-cheek in your book is truly heartwarming. Number three is avoid debt. Number four is save a portion of every dollar you get. Number five is the greater percent of your income you save and invest, the sooner you'll have F-human. Try 50 percent with no debt. This is perfectly doable. Number six, put this money in VTSAX. We've beaten that one to death. And number seven, realize the market and the value of your shares will sometimes drop dramatically. We can't emphasize this enough, as we have in this podcast. People all around you will panic. They'll be screaming, sell, sell, sell. Ignore this. Even better, buy more shares. Number eight, when you can live off the dividends of VTSAX, that makes you financially free. Now, the dividends typically are 2 percent. That doesn't meet the 4 percent rule, but that's a conservative. If you are an over-saver, I guess that's realistic. Number nine is the less you need, the more free you are. And the power of frugalism and value-based spending cannot be overemphasized, I think. Now, our group has a few questions to close up, and we'd like to honor those. Sure. Holly asks, what do you recommend these days for the bond portion of a three-fund portfolio? I think about this question all the time, as the Total Bond Market Index Fund hasn't been working out the way I thought it would based on the book. I can't be alone in this. And we talked about that a little bit, but do you have any comments for Holly? Well, Holly, what I would say is you're probably reacting to, I think it was last year, 2020, when the Total Bond Market Index Fund, along with bonds in general, had a particularly brutal year. In fact, I think in this historically brutal year. And so there are no guarantees in investing. And at any given point, any recommendation can have a bad run. And that was certainly a bad run for VTSAX and by extension for bonds in general. But if you refer back to the earlier part of this conversation when I went into a little more detail as to why you own the bond fund, which is as ballast for your portfolio for the stock part of it, I think it's still a good thing to have, and I stand by the recommendation. So our next question is for Paul, and he says, if JL was starting late, say age 50, with a small 401K or no retirement, what advice would he give? What levers would he pull to close the gap, such as side hustles, multiple jobs, or real estate? Well, so we talked about real estate already, and, you know, my take on that real briefly is it's a part-time job, and it's a business, and you need to do your homework to learn how to do it. And then it could be a very powerful way to build wealth. So that's that. Any side hustle that you take on that brings in extra money that you're willing to divert to your investments is obviously a good thing, a very personal choice, but if you have ideas for those and you can do that effectively, by all means do that. The other thing I would say is that if you think in terms about the aggressive savings rate in those nine points that Bill just covered, my recommendation of 50%, starting from scratch, from ground zero to financial independence is about a, as I recall, the chart is about a 12-year journey. It's a 12-year journey whether you're starting at 20 or 50 or 60. And so there you go. It's not a function of how old you are. It's a function of your savings rate and the amount of time that it takes there. If you want to get there in a shorter period of time, then a higher savings rate will do that for you. And the last comment I'd make is that it's not an on-off switch. You don't have to get to 100% financially independent based on the metric of the 4% rule 25 times. Every step you take, you get a little bit stronger. So the moment you start on your journey, the moment you start saving and investing, the moment you put the first dollar aside, you are a little bit stronger than you were the day before. And let's suppose you start the journey at 50 and you don't get to that full FI number, well, you won't have a handful of money either. Okay. We have a question, or actually maybe two, from Robin. Please ask him if he thinks the proliferation of automatic flows into index funds and the prevalence of algorithmic trading puts passive index investors at a disadvantage. If the answer is no, then why not? So I think the answer is no at the moment because the market is so large. One of the concerns people have is that if everybody starts indexing, then the mechanism of buyers and sellers constantly trying to figure out what the value of a given stock is would theoretically go away. As Jack Vogel liked to point out, and I think Warren Buffett has made this point too, back in the 60s and 70s, you know, there were no index funds. And the value of stocks were set entirely by the buyers and sellers day to day. But today, even though there are index funds and they're a pretty big percent of the market, I don't know what percent they're off in, the market has grown so much that the part of the market that's still done by active traders is much larger than it was in the 60s and 70s. So there is plenty of that kind of trading going on to provide the function of setting value for companies. So I'm not concerned about it. I don't think index fund investors are at a disadvantage. If the trend were to continue in such a fashion that eventually that would happen, then active managers would begin posting out performance. And active management, by the way, to be clear, has not gone away because most people can't accept just investing in index funds. Most people want to play the game. So, you know, most people are willing to pay those fees to do it. If, in fact, that active investing were to start to be able to outperform, then people would begin to move in that direction and things would come into balance again. So it's an issue that I don't think we need to spend any time worrying about. And I'm certainly not going to abandon the advantages of index funds to try to contribute to solve a problem that I don't see. Do we want to read the rest of that question, Bill? No, that's okay. We already went over it. Okay. Go ahead. So Jenny asks, is there anything he would change or add to his book if he were writing it today? You know, that's a great question, Jimmy, and it's one that I think about on occasion because occasionally I think that maybe I had to do an updated version of the simple path to wealth. But the truth is nothing fundamental. I mean, there are a lot of things in the book that were time sensitive. So, for instance, in various parts of the book I talk about what the limits are for an IRA contribution or for a 401K contribution or what have you. And obviously those have changed over the years as, you know, the government has increased the amount you can put in IRAs and 401Ks. And some of the laws around those kinds of things have changed. And so if I were to update the book, I would obviously update those kinds of numbers, and then within a couple years those would again be out of date. But the core principles of the book, no, there's nothing I would change. And what's really been eye-opening for me is this third book I'm working on or that I finished now and is coming out in October is called Pathfinders, and it's a collection of stories from people all over the world who have read The Simple Path to Wealth and adapted it to their unique circumstances. And this includes a lot of people who are not residents of the United States. It's a very U.S.-centric book. People have come to the book, you know, years after I wrote it when all those detailed things had changed. And people appear to have absolutely no trouble looking past those specific things that are now out of date and seeing the basic principles and adapting those principles to whatever, you know, the current limits are on contributions or even living in an entirely different country that may not have access to the specific funds I'm recommending. So I have actually over the years become more comfortable with the fact that The Simple Path to Wealth is fine the way it is and probably will be fine the way it is 50 years from now, even though those details will even be more out of date. I hope that makes some sense. After you achieve five, you have a chapter where you talk about a word like living like a billionaire. Can you speak to what you mean by that when we reach sort of the top of Maslow's pyramid? Well, the chapter is giving like a billionaire. And it's a chapter about how I go about charitable giving, and it's basically around donor-advised funds, which allow you to very tax-effectively put a lump sum of money into a donor-advised fund and get that tax deduction in the year you do it and then distribute that money over an extended number of years. So, for instance, and this is, of course, once you become wealthy, but for instance, let's suppose that you want to give away $100,000, and you could give that away at $20,000 a year over the course of five years, and you would have no tax advantage to that whatsoever because if you're married, the standard deduction is now $25,000 or something like that. So it would be eaten up at the standard deduction. If you did it with a donor-advised fund, you can take that $100,000 and put it all in the fund today, and then when you do your taxes for 2023, you have a $100,000 deduction. Now $25,000 of that will be eaten up by the standard deduction, but still you have a $75,000 deduction you can put against your other income. And then you can still distribute that $100,000 over the next five years, $20,000 a year. And then at the end of that five-year period, if you want to continue to do it, you can make another lump sum contribution of $100,000 and do it again. So that's just a more tax-effective way to give money away. And the final thing I'll say is that if you follow the simple path to wealth, you will indeed become wealthy. And one of the most satisfying things I think any of us can do from a purely selfish point of view is give that money away to causes we believe in. Now, everybody talks about that as being a good thing to do, a noble thing to do, and it is all of that. But at least my experience and the experience of a lot of the people I know, it is also selfishly the most enjoyable way to deploy the money that we've accumulated. It's just an enormously satisfying thing to do. Yeah, actually, I have a donor advice fund, if not two, and it's the best way to give. It really is your own foundation. I love giving appreciated shares, and it creates sort of a perpetual money-giving machine. You can give away the gains, and things will grow, and you'll never have to worry about giving cash, which to me is a disadvantage. So we will do an episode on donor advice funds because I think giving is so important when you reach your financial freedom, and I agree with you. It does feel like giving like a billionaire. All right, we're coming to the close of our podcast. I wanted to quote from you in chapter, I think, 33 of your book. You speak specifically to late starters, which I think is awesome. And your quote is, if you're a bit more seasoned, don't despair. It's never too late. It took me decades to figure this stuff out. Like mine, your road has likely already had more bumps than those who follow this path from the start will endure. But those bumps are in the past. It is your future that matters, and that starts for all of us right now. Well said. I love that quote. I love that quote. We need to start now. I'm a better writer than speaker. At any rate, we have a few last questions for you. Are there any specific tips that you have for our late starter listeners? Is there anything that you'd like to tell them about this simple path to wealth? Well, we kind of covered it, so I'm at the risk of repeating myself. But I think I would say, first of all, your age doesn't matter in the sense that depending on your savings rate, it's about a 10-, 12-, maybe 15-year journey. So that's true whether you're starting at 20 or you're starting at 60. You don't have to finish the journey to benefit from it. You don't have to go – and I say it's a 12-year journey, I'm talking about from zero to where you are financially independent, as defined by the 4% rule. You don't have to get all the way there to benefit enormously. Every step you take, you're a little bit stronger. So there's no reason, no matter what your age, not to start. And it's simple. It's not always easy to stay on the path, but the path itself is pretty straightforward. J.L., give us an idea of some of your favorite resources – blogs, books, or podcasts – that you would recommend to our late starter audience. There's so many. I hate that question because I'm bound to forget wonderful resources and offend those people if they happen to listen. You know, wow. In terms of books, one of my favorites out there is The Psychology of Money by Morgan Housell. I think it's a wonderful book in and of itself. It's in many ways a perfect companion to my book, and I guess I tend to think of books in that way. Quit Like a Millionaire by my friends Christy and Bryce, when they're millennials, so kind of the millennial journey. You know, almost a case study of how they did it. Again, a great companion to my book. In terms of blogs, well, their blog is a great one. The Millennial Revolution, Mr. Money Mustache is a classic. The Mad Scientist doesn't write too much anymore, but he does great stuff. The Choose F.I. podcast is a great resource. The Earn and Invest podcast is a great resource. This podcast is a great resource. I mean, you know, but all the other podcasters are angry at me. All the other book authors are angry at me. So thanks a lot, Becky. I backed you into a corner, didn't I? I think the point of this is it is learnable, right? It is doable. Oh, absolutely. Yeah, absolutely it's doable. I mean, yeah, in fact, that's one, if I can tell my own new book coming up, one of the things I love about Pathfinders, and when we started on this book, you know, we put out the call for these stories, I had no idea who would respond or if the stories would be any good or if they'd be usable. And, you know, frankly, we got some that weren't. But we got about 100 that were great. And the thing that's most inspiring to me is how doable it is. It really, it really, there is a trope out there that, oh, you know, financial independence is only for white male engineers. And I'm a white male. I'm not an engineer, as it happens. But that's just absolutely nonsense. And it's been nonsense from the beginning. And I've just met all kinds of people that are not white male engineers who have done it. And Pathfinders is a book filled with stories of people who, you know, at first glance you would think they don't have a chance. I mean, this is, you know, it's not like we're replacing engineers with, you know, bankers or something. I mean, you're talking about people who start from incredibly humble beginnings. That's one of the things that I like about Quit Like a Millionaire is Christy Shen really grew up in abject poverty in China. And she's a millionaire. You know, so putting certainly, you know, a lie to the idea that, you know, you have to be a certain kind of person or you have to already be born into privileged circumstances or something like that. So, yeah, it's truly, it's a path for everybody. It's a matter of whether or not you want to take it. And, you know, when you talk about savings rates and, you know, I have people tell me all the time, I couldn't possibly save 50% of my income. Well, that's, well, it depends on what you want. You know, if you want financial independence, then you'll figure that out. If you want other things more than financial independence, and let's be clear about this, most people do want those other things more, then that's okay. I mean, I, you know, it's your money. You can spend it however you want. But whatever you're spending on, that's what you want. And I, but if you want financial independence, it's perfectly doable. You're going to have to do things differently. You know, you're not going to become financially independent doing what you're doing now, assuming you're not financially independent. But it doesn't mean it can't be done. It just means that you have chosen not to do it. And, again, that's a little bit of a legitimate choice. I would never presume to tell anybody else what to do with their money. But I will presume to say that don't tell me you can't do it when really what you're telling me is you're choosing to do something else. Well, this has been an excellent resource. You're so generous with your time and your knowledge. We want to thank you profusely for joining us today. We'd like also to let our audience know where they can reach you, should they have additional questions and need some reassurance or support or encouragement. Well, first of all, I'm honored that you would ask, and it's a privilege to be on the podcast. As I mentioned already, I think it's one of the best resources out there. Well, we appreciate that. We're young, we're new, we're growing. And we feel that our audience is an underserved, overlooked audience that is really, as you've mentioned, the majority. It's the majority of America that consider themselves late starters. And we're hoping to reach them. So we appreciate your force. Your book is a game changer. I want the whole world to read it. Wouldn't the world be just such a better place if we all follow the simple path to well? Well, I mean, you know, I think so. And it's very gratifying and humbling and a little amazing to me, quite honestly, to hear people tell me how it has changed their life for the better. But to finish answering your question, the blog is JLCollinsNH, which stands for New Hampshire, where we used to live, at it.com. And I'm very bad at answering questions, so, you know, I like to go on podcasts. But the blog has a wonderful search function. So if you want to know what I think about something, you can enter the search function and probably find it, as people might have gathered from our conversation. You know, one line of questions that I hear a lot is, you know, what do you think about bonds now today? And, well, as you've heard, my views don't change based on the simple path to wealth doesn't change based on what's happening day to day. So if I've written about bonds, that's my view on bonds. If for some reason something changes, then I write about it. So the search function is a good one. And then for the blog, if you want to follow me on Twitter or Facebook, you know, you can go from there. J.L., would you tell us about the Pathfinders book? When is it coming out, and how can people connect with that? So it's coming out on October 31st. And if anybody's interested in it and you want to do me a favor, you can preorder it. The reason that's a favor, an advantage to me if you preorder it now rather than when it comes out, is evidently my publisher tells me that that influences the number of copies bookstores will order, depending on how the preorders go. And so maybe in the show notes we can put a link for how to preorder it. And we've already talked a little bit about the nature of the book, so I won't bore you with that. But, yeah. So it's available for preorder now? It's available for preorder now. Great, great. Thanks for that. Well, J.L., this has been amazing. I just have really enjoyed this conversation. Again, I want to tell you how much difference you made in my life personally with your book, The Simple Path to Wealth, and I know that it has affected, like I said before, hundreds of thousands of people. And you gave me the tools I needed to do what I wanted to accomplish, which is, you know, there's nothing special about me. I'm just the average Joe. And I think that anyone can glean what they need out of your book. So thank you. And thanks for being here with us today. We've really enjoyed it. Well, as I say, Becky, it's truly my honor, and I'm pleased that you would extend the invitation. And hanging out with you guys and talking has been a blast. I've enjoyed every moment of it. And thanks to your audience for the questions they put out. Great stuff. Well, thanks again, J.L. We'll see you hopefully soon. I'll look forward to it. We hope you've enjoyed this episode of Catching Up to Five. We would appreciate it if you could leave a five-star review so that our message can reach others. We are not lawyers, financial advisors, accountants, or tax experts. Please consult your own professional advisors before making any important decisions. Our content is for entertainment and education purposes only. We'll see you next time on Catching Up to Five.