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October 15, 2020
Episode 48 of the NewRetirement podcast is an interview with JL Collins — a best-selling author and financial independence guru — and discusses the what, why, and how of Financial Independence as well as Collins’ book, “The Simple Path to Wealth”.
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Steve: Welcome to The NewRetirement Podcast. Today, we’re going to be talking with JL Collins, a bestselling author and financial independence guru about the what, why and how of financial independence, and his book, The Simple Path to Wealth. We’re going to try to distill a lifetime of financial lessons into one podcast and dive into what really matters for most people. JL achieved financial independence through active investing before he learned about passive index investing, but then started a blog and literally wrote the book on how to achieve FI in the course of trying to pass on what he’d learned to his daughter, Jessica. He loves to travel and also host an annual international Chautauqua outside of COVID times around the topic of financial independence. With that, JL, welcome to our show. It’s great to have you join us.
JL: Well, thank you, Steve. It’s an honor to be here. I have to say initially, it’s interesting introduction that you mentioned my dirty little secret, which is actually achieved financial independence with active investing, even though I’m a big guy indexer. The truth is I knew about indexing long before I was smart enough to embrace it, so there’s another dirty little secret, as long as we’re airing them.
Steve: Yeah. I was, in getting ready for this, I was clawing through your blog you know, jlCollinsnh.com, and you’ve obviously had a long career. It was interesting, I was hitting … some of the highlights that I saw were one, you have this … you’ve had this really diverse career working across all these jobs, but also that you achieved kind of financial independence 15 years into your career back in 1989. I thought that was, as you’ve been there for quite a while, kind of your perspective on active versus passive has changed. Any highlights you want to share with us about kind of your journey to where you are today?
JL: Well, the interesting thing about achieving it in 1989 is I didn’t realize it at the time. I think you have to appreciate, and hopefully your audience will appreciate that there was no internet or very little internet, no internet I was aware of in those days. I wasn’t even aware of the term financial independence. I’m not sure it had been coined at that point. I had frequently stepped away from my various jobs at different times for sabbaticals that I wanted to take. 1989 was the beginning of the longest of those would stretch out five years. About three years into it, our daughter was born. My wife also quit her job, so we had no earned income coming in and our expenses have gone up a little bit. Although we lived modestly. I noticed as I was totalling up the numbers at the end of that third year something really remarkable, that in spite of not cutting back our lifestyle, we were worth more at the end of the year than we were at the beginning.
JL: Then I look back at the first year and the second year and found in both those years, that was also true. I knew something remarkable had happened, but a little disturbingly looking back on it now, I wasn’t smart enough to really appreciate the significance of what had happened. I just kind of thought, well, that’s cool, then I went on with my life. It wasn’t years later, until years later, when I came across the 4% rule and the idea of financial independence, and I put those numbers to it that I realized, oh yeah, that’s what happened back then.
Steve: Yeah. It sounds like you really got fully engaged in this in 2011 when you started your blog, you kind of put all your thinking together and started to get it all down on paper.
JL: Yeah, 2011 is when I started the blog. It’s interesting, when you start to write things down, you have to think through them a little more clearly than when you just have them rattling around in your head. From the moment I got out of college, I knew I wanted to have what I’d come to learn was called F-you money. I found that in a novel by James Clavell, Noble House, that concept. F-you money, in my mind, wasn’t enough to never work again. It was just enough that I never had to stay in a job I didn’t want to stay at any longer, and I could afford to take those sabbaticals that I talked about earlier. Then it was a journey of different kinds of investing, as I learned primarily by making every possible mistake you could make.
JL: As I say, I actually achieved financial independence picking stocks and picking active fund managers. I don’t recommend that because that’s simply not the most effective or efficient way to do it, but it certainly is possible to do it that way. Indexing is just more powerful. When I finally adopted indexing, and I’d actually learned about it in the middle of ’80. As I say, I was negligent in not embracing it sooner. I mean, things just came together more easily and even work quickly. It was in 2011 where I started putting down all these thoughts, primarily for my daughter, but I really had to think through why I believed, at that point, the things I believe.
Steve: Yeah. Well, it’s been quite a journey since then. I mean, for our listeners, I called … as we were ramping our business, I learned about F.I.R.E. I wrote an article in 2016 in like Mr. Money Mustache, J.D. Roth and JL Collins, so I started calling these guys. JL picks up the phone and we still had a few conversations. Then, I think that’s actually published A Simple Path to Wealth that year. Is that right?
JL: Yes, exactly. The spring of 2016.
Steve: Little did I know how famous you’re going to get to, and then I saw, also in 2018, you had I think the most popular Google talk or outside of … there was some filter for it, but like 750,000 views, is that right for your Google Talk that you did?
JL: Yeah, it’s coming up. I don’t think it’s quite at 750 yet, but it’s coming up on that. If I’m not mistaken, it is … The most watched Google Talk is 33 in terms of all the Google Talks ever done, it’s 33rd, but I think it’s the most watched by somebody who’s not famous.
JL: For somebody who is not a famous person, it’s doing pretty good.
Steve: You’re the most famous, most popular non-famous person, but actually, you are becoming famous. I saw you joined Twitter.
JL: In some small fashion, I guess that’s beginning, and nobody’s more surprised than I.
Steve: Well, I do want to give you credit also. I think VTSAX recently crossed what? A trillion dollars. So, I do think you deserve some small amount of credit for … I first heard it from you. I know you’ve.
JL: I’ve had people say to me, they make comments along those lines, and I do know that some people are in VTSAX because my influence, but I imagine it’s a very small portion of that $1 trillion. Then so far as I know, Vanguard doesn’t know that I exist. You see, they’ve never reached out to me and said anything, and of course, I’m a Vanguard customers. When I reach out to them, it’s not like, hey, JL, how are you doing? I’m just like any other customer.
Steve: For our users who are listeners who don’t know this, so VTSAX is a index fund by Vanguard that covers the whole US stock market at a very low cost basis.
JL: Yeah. It’s what’s called a total stock market index fund. It’s the one night I’m personally in, it’s the one that I have my daughter in, it’s the one I recommend most commonly, then VBTLX is the total bond market fund for when you add bonds to the mix.
Steve: Yeah. We’ll dive into that more, but I will say that finally, after four years I do own VTSAX, though it took me four years to take your guidance and run with it.
JL: Well, it probably took me 20 to finally embrace indexing, so don’t feel bad.
Steve: Yeah, no, exactly. I actually was. I was like, well, I kind of feel bad about this, but then I was reading you, I was like, oh, well, like JL He has been doing it for decades and not here yet.
JL: He was even a slower learner.
Steve: All right, so I’d love to talk … this is really about kind of the what, the why and the how of financial independence. We’d love to hear kind of from your perspective what it is, how you define it and maybe how you measure it. I also maybe a little bit more on the F-you money. I heard the F-you money very early on in my career too. It did really resonate with me and it’s something I pursued and achieved, which freed me up to think more broadly about how I spend my time. But yeah, how do you define FI?
JL: Well, so first of all, with the caveat that this is just my opinion and other people define it differently, so this is not the definitive definition, but I think of financial independence is that point where you have enough money that you don’t have to trade your time or your labor for money. You have enough money that … well, money that, that money earns is enough to pay all of your bills. F-you money on the other hand, in my mind, and again, other people define these things differently, is simply having a enough money that you can make bolder choices in your life, but not necessarily enough money that you’re never going to work again.
JL: Now, as to the formula as to what financial independence looks like, I think I referenced a little bit early in the conversation, the 4% rule, and that’s simply suggests, and it’s more a guideline in my mind than a rule that if you have enough money, that 4% of that is equal to, or greater than your annual expenses, you are, by definition, financially independent. If you have $1 million, 4% of that is $40,000. If you are spending $40,000 or less, you are financially independent. If you are spending more than $40,000, then you are not quite there yet, although you have a very nice bile of F-you money.
Steve: Yeah. Assuming you’re invested efficiently with low costs and getting market average market returns for the last whatever, history.
JL: That’s a great point. All of this is dependent on investing in low cost index funds. If you’re investing in something else, then these parameters may or may not work.
Steve: Got it. How did you define F-you money for yourself? What was the threshold?
JL: The very first time I had what I considered a few money was in my … because mid-20s, and I managed to save the princely sum of $5,000, now of course, $5,000 was worth more back in those days than it is now, but not that much more, but $5,000 was enough that I could have quit my job and gone off and traveled in Europe for a year. $5,000 certainly would’ve lasted a year in Europe those days, and probably would have given me a little cushion when I got back to find another job. So, as I say, it just permitted me the opportunity to make a bolder choice than it had then if I had been living paycheck to paycheck and worrying how I was going to pay the rent.
Steve: Yeah. It sounds like you’ve taken sabbatical, so you kind of deployed your savings to free up your time then early on.
JL: Exactly. Again, remember, I had no concept of retiring early or even financial independence as a goal. I just knew I wanted to have enough money that it provided … to me, it represented freedom. I knew the more I had, the more power I had, if you will, more freedom I had, the bolder I could be in my choices, but I actually achieved financial independence without even being aware of the concept, but that allowed me to periodically step away from jobs and take sabbaticals. I always liked working. My goal was never to retire early. I think, even if I had been aware of that concept, I don’t think that would have appealed to me. I liked my career. I enjoyed it. I just didn’t want to have to do it all the time. I think because I didn’t have to do it all the time, because I could step away whenever I chose, that’s probably one of the reasons I enjoyed it as much as I did.
Steve: Yeah. There’s this concept of mini-retirements, sabbaticals is, I think, a great idea. It’s kind of interesting what’s happening with COVID where people are going remote. They’re trying out different areas. One guy on our team is about to move from Vegas to Idaho. The circumstances of life changed, and they just were like, okay. First, I think they were thinking, oh, I’ll just move somewhere locally. Then they were like, where could I move that’s completely different and brand new? And they’re making this move. I think he actually bought a house, without visiting it, just completely online.
JL: In Idaho?
Steve: In Idaho. I’ll see, I actually have to talk to him about it, get the exact details. How about for your career? Beyond travel, did you take any extra risks in your career? You’ve done so many different things.
JL: Well, I suppose the risk I took was occasionally stepping away from jobs, but I had a pretty good … I mainly spent most of my career in the magazine publishing business, and I had a pretty good reputation in that business. Now, back in those days, stepping away from a job for several months or, on occasion, several years was not very well accepted, and so I had to be creative with my resume at times to account for those gaps, so to speak. But yeah, I was pretty … it was pretty easy for me to step back in when I chose to step back in. But again, I was never in a situation where I had to worry about paying the rent or the mortgage or putting food on the table because I’d always save 50% of my income, and it built up this pile of F-you money that gives you a lot of freedom, a lot of power.
Steve: Nice. How did you make that transition from kind of active to passive? Was it like a hitting a switch or did you do it over time?
JL: Yeah, it’s an interesting question because sometime in the mid-’80s, I had a friend of mine who was a financial analyst, and he was the one who first brought passive investing, which is to say index funds to my attention, and Vanguard and Jack Bogle. The great irony, by the way, is Jack Bogle started Vanguard, and I believe he started the first index fund that S&P 500 index fund in 1975. 1975 was the very first year I ever invested in anything. Of course I bought two individual stocks because, and in 1975, I didn’t know about Jack Bogle or Vanguard or index funds, but around 1985 my buddy Albert talked to me about them and made the case for them, and I was just too bullheaded and stubborn and set in my ways to appreciate the wisdom of what he was sharing with me.
JL: We had conversations over the years and it probably took me 10, 15 years before I really finally looked at it with an open mind. Once I did, it just became obvious that it was the better way. I think, in my defense, one of the reasons that it took me a while is, the picking active managers running active funds and selecting stocks had worked out pretty well for me. Again, I reached FI doing that. In a sense, I suppose my attitude was, what I’m doing isn’t broke, so why fix it? But a more astute person would have had their eyes wider open and said, oh, wait a second, this way has worked out okay, but this is a better way, and they would have seen that sooner. By defense, I did eventually see it. I’m just slow.
Steve: Yeah. Well, you’re still ahead of most of the market. I mean, I think if you look at a chart of … it’s like exponential growth of kind of a passive in index investing, and the assets there was … it was pretty low. I don’t know the exact numbers, but it was low, 1975 and the 1985 is still like nothing, 1995 is still nothing, and then eventually, only in the last decade, has it really gone almost straight up and now it’s threatening. Vanguard, the other year was, like last year, it was a billion dollars a day in flows. It wasn’t just.
JL: Wow, I didn’t know that.
Steve: Yeah. It was huge.d it wasn’t necessarily that it was huge, but now the more active oriented firms are feeling this, so you’re starting to see passive index is really growing and active fund managers and families are losing assets, so they’re feeling it. It’d be interesting to see, does the pendulum swing back and forth? Because I think there has to be a certain amount of active investing for price discovery, but how much, who knows? I don’t know if you have an opinion on that.
JL: This is an interesting subject, and if you’ll indulge me, I’ll talk about it a little bit. When Jack Bogle first came out with the idea of index funds, he was roundly ridiculed. Fidelity, Ned Johnson, who started Fidelity’s the patriarch of the family that owns it. He ran a series of ads which Bogle evidently had framed and put up in his office condemning index funds, calling them unAmerican among other things, because I think he recognized the incredible threats that they posed to the golden goose that was high fee active management. You’re right. It was very, very slow to catch on because it’s so counterintuitive. Again, maybe this is part of my own defense. It’s very counterintuitive for somebody who’s picking stocks to accept the fact that gee, if you just buy every stock, you will do better, as you think to yourself, well, gee, if I just avoid the bad ones, I can outperform the index. But of course, sometimes those bad ones are tomorrow’s awesome turnaround stories.
JL: Well, you think to yourself, well, if I just buy the good ones, then I can surely outperform the index, but of course, today’s good ones are tomorrow’s Enrons. It’s amazingly difficult to outperform the market. They actually pick stocks that will outperform to avoid those that will underperform. Then when you add onto that, the layer of cost, that active management it requires with the managers and the research and the analysts and what-have-you, it becomes literally impossible over extended period of time. I happened to see an article today, as a matter of fact, about the Harvard endowment. Harvard has an incredibly large endowment into billions of dollars. About 20 years ago, it was outpacing the market.
JL: When I say the market, I mean the index, the broad-based market, for almost a decade or so, and they were lionized, and the last 20 years, they’ve lagged behind. The article talks about a lot of reasons this may be the case, but my only takeaway from it is, it’s almost impossible to do that consistently. In fact, research indicates that looking out 30 years, less than 1% of active managers succeed in outperforming, and that’s statistically zero. Yeah, now in terms of, is indexing going to take over the world, it’s certainly grown in leaps and bounds as it should given how well it performs and more and more people become aware of it.
JL: I happen to think that the narrower the actively traded part of the market becomes, the smaller it becomes, the easier it will be to out perform. I would anticipate, at some point, as indexing becomes, if it becomes dominant enough, and I’m not convinced that it will, but if it does, I think at some point we’ll begin reading stories. Of course, there’s so much money to be made in active investing. You can be sure those stories will appear at the moment they’re available. We’ll read stories about people outperforming. Then because people are always looking for a better mousetrap, the wheel will turn and people will flood back into those funds. At least the silly people will. The smarter people will realize that this too will pass and will stay the course with their index funds.
Steve: Yeah. That’s awesome. Just a little bit more on kind of financial independence, in terms of … how do you think it benefits both individuals and society for people to be pursuing this, and also, do you think that kind of average normal, and can anyone pursue this idea?
JL: That question covers a lot of ground. The easiest part of that question to answer is the individual. Clearly, if you value your freedom, if you value having control over your time, the more financially independent you are, the better off you are. Money is the single most powerful tool humans have created, and we live in a very complex modern society, and it’s the tool most effective in navigating that society. Those people who learn how to deal with money, how to navigate with it, how to invest with it, they have a better life, a freer life, a life of more opportunity than those that don’t. I think, by extension, that is probably good for society, it’s probably good for society to have free, or at least if you believe in a free society, to have people who are freer than less free.
JL: I think to the extent that people are free to choose what they want to do, what they’re really passionate about without worrying about paying the bills, which is what financial independence gives you, you’ll probably get happier, more productive, more effective people. Maybe I’m an example. You mentioned that in 2011, I started writing this blog and then I wrote this book, and this has certainly been, although it comes late in my life, the most satisfying decade of my life, maybe if I’d been more aware of the goal of financial independence and been aware of what I achieved back in ’89, those last couple of decades would have been even more productive than they have been, although I really can’t complain about them. I forgot the second part of your question at this point.
Steve: No, I think that’s right. I was curious about kind of like, how does it help society and individuals? I agree. If people free up from, or are free to pursue what they are most interested in, then they tend to do better work, like you’re seeing in your own life.
JL: You just reminded me of the second part of your question, which was, can everybody do it? The answer to that question is yes, I think almost everybody can do it. The more interesting question is, will they? And the answer to that question is no. Most people will never take it on, most people are not even aware that it is a possibility or an opportunity. We live in a culture and they’re surrounded by media that’s continually drumming into people’s heads that such things are impossible, that they’re not even making enough money to live on day-to-day, and there’s never any discussion as to how the choices individuals make influence that. So, most people insured are goofs with their money. I don’t think most people will ever be financially independent, but I think almost everybody could if they were aware of it and were willing to choose it, because of course, like any choice you make in life, when you choose buying your freedom, you have to divert money from buying other things. That’s not a choice that our culture supports.
Steve: What percent of people, if you had to give an estimate, do you think might take on attempting to get to FI?
JL: I wouldn’t even hazard a guess. What I will say is that in the FI community, there is a sentiment that this makes so much sense, which it does, that it’s so logical, which it is, that it’s so beneficial, which it is, that almost inevitably more and more and more people will be drawn to it until the large percentage of the population, maybe everybody, is embracing it. I don’t happen to fall into that camp. I think people pursuing FI are destined to be unicorns. It’s just like we’ve seen more and more people go index funds. I think the moment there’s any indication that there is some possibility of actively managed funds outpacing them, they’ll flood back the other way, because people are fickle. They’re not willing to stay the course and appreciate the benefit.
JL: The other thing I would say is that, while there’s a lot being written in the FI world today, we’re tiny drops in a huge bucket that mostly promotes commercialism, mostly promotes that you need a break today and you deserve this and you deserve that. Of course, all those things that you deserve are things that other people are trying to sell you.
Steve: For sure. Well, I would love to dive into what really matters, in terms of how to get there. I was reading your blog again, and that you have the nine basics. Can you take us through the nine basics?
JL: It’s been a while since I’ve written it. I would have to pull those up in front of me myself.
Steve: Okay. I have them in front of me, so I can do it, and then we can talk about it if you want.
JL: Sure. That’s one of my very earliest posts.
Steve: First, avoid fiscally irresponsible people. Never marry one or otherwise give him or her access to your money. Any color commentary on that?
JL: Sure. One of the biggest destroyers of wealth is divorce. I can imagine few things that would be more discouraging, that it’d be married to somebody, and while you’re diligently saving and investing and trying to build your F-you money and financial independence, they’re out squandering it. I think it’s important to be sure that if you tie your life to somebody else that you share lots of values, and one of the more important ones is probably your values around money. I, by the way, my wife and I never had that discussion when we were dating, and just very fortunately for both of us, as it happens, we share exactly those values. Maybe we got that sense of each other as we were dating without the conversation. I’ve gotten pushback on that point, by the way. People have said, that’s terrible, you should only marry for love. Well, yeah, good luck with that, and that’s why people wind up getting divorced, so be a little more clear-eyed in that decision would be my advice.
Steve: Did you make her go Dutch when you were having your first dates and she got a sense.
JL: No, I can’t say I ever did that, but that was a different era too.
Steve: I do see people talking about this, in like the ChooseFI community where they’re talking about their significant others and trying to educate them about FII, or saying, hey, this person has just got a new job and bought a brand new car and that’s got me worried. Second one, avoid money managers. It sounds like … yeah, I’d love to hear your take on this.
JL: Yeah. By the way, on all these points, I have posts on the blog and most of them are chapters in the book. Money managers are expensive always, and it’s very rare to find a good one. It’s an unfortunate fact that the interests and needs of a money manager are not aligned with those of the client. That means that a money manager, to do best by their client is frequently called upon to do things that are not in their own personal best interest. That takes pretty saintly person to reliably do that. It’s very difficult to find one that’s good and competent and honest. I suggest that, by the time you do the kind of homework you would need to recognize that kind of money manager, you could have easily taught yourself to do it yourself. A great example, real quickly of what I mean by those conflicting interests is let’s suppose you sit down with your money manager and your question is, should I pay off my mortgage?
JL: Well, that’s an interesting question. In some cases, the answer might be yes, in some cases, the answer might be no. For your money manager, it is always a bad idea for you to pay off your mortgage, because by definition, that takes capital, that that person is managing for you and getting paid on away from your portfolio and into the bank, paying off that mortgage. For that money manager to recommend you pay it off, regardless of how good a decision it might be for you, they have to decide to make a decision that is bad for them.
Steve: No, exactly. More and more, well, some investment advisors are fiduciaries and they’re supposed to act in your best interest, but we had another guest, one of our users, Glen Nakamoto, where he was talking about building retirement income and paycheck, and he wanted to take a third of his assets and buy immediate annuities. Now, you can debate whether or not it’s a good idea, but he couldn’t get any advisor, and he talked to a number of them who were all fiduciaries to say, “Hey, this could work.” Instead, they wanted to do bond ladders or other kinds of fixed income strategy that they would manage the money, and he felt like they had a conflict of interest, but they weren’t calling that out clearly.
JL: Yeah. First of all, just to be clear, there are good, competent, honest financial managers out there. I don’t mean to suggest that there are not, and kudos to those that are because they’re providing an incredibly important service, because most people, as I said earlier, goofs on their money. If they happen to stumble into the hands of somebody who’s competent and honest, they’ve just gotten an extraordinary blessing in their life. So, I salute those kinds of money managers. I just suggest that it’s very, very difficult to find them, or for that matter, to recognize them when you do. One last point I’ll make is yes, you certainly expect and only look at money managers who are fiduciaries, but just because they are fiduciaries doesn’t mean that they actively put your interests first.
JL: It means they should, it means legally they’re required to, but as we all know, people don’t always do what they should or even what they’re legally required to do. That alone is not a guarantee.
Steve: Yeah. It all start with education and kind of making your own decisions and being a critical thinker. Next one, avoid debt.
JL: Yeah. You can’t be financial independence carrying debt. Debt is a ball and chain around you. It’s like trying to run a sprint with a ball of chain around your ankle. Mr. Money Mustache, my friend is fond of saying, if you have debt, it’s like your hair’s on fire. Nothing else matters until you put it out. Now, of course, there’s always pushback about, what about good debt? What about the debt for buying a house? Or what about the debt for starting a business or those kinds of things? Yeah, some debts are worse than other debt. I mean, credit card debt’s much worse than those two, but no debt is good debt. Some debt is necessary debt, but if you look at getting a mortgage for a house, and people say, well, that’s good debt.
JL: That rapidly translates into, by the way, at the encouragement of banks and mortgage lenders and real estate agents that quickly escalates into what’s the maximum amount of debt your income can carry, and therefore the maximum house you can buy? That’s a terrible thing to do. You should be buying the least expensive house that meets your need and taking on the least expensive debt in order to accomplish that. Debt is never a good thing. Sometimes it can be, if carefully used, a useful tool to enhance your lifestyle in a way that you want to enhance it. But by definition, enhancing your lifestyle is counterproductive to becoming financially independent.
Steve: Interesting. What I would love to … I’ll save this for another podcast, but I think I have some thoughts about using … well, let me ask you this question. If there was a way to use debt like a line of credit to run a tax arbitrage, so one of the things we talk about is Roth conversion. A lot of our users have most of their money in qualified savings, they’re heading towards retirement and they’re interested in converting it to Roths. One way to do that is you find years where you have low income, convert the money in those years, because you have to recognize it as income, get it into the Roth vehicle, which then grows tax free and can go to your errors largely tax-free. You could potentially use debt to subsidize those low income years as well, as a way to finance this. Do you think a tragedy like that holds water or would you say too complicated and risky?
JL: Yeah, so first of all until you get to the debt part, I absolutely agree with the strategy you described. If you have low income years, it’s a good time to shift money into Roth accounts, and then it grows tax free forever. If your income is low enough, sometimes you can do that with no tax consequences at all. When you talk about borrowing the money in order to do that, you’re laying on a whole nother level of complexity, and of course, another level of costs, because you have an interest rate associated with that debt and you’re ultimately going to have to pay it off. That puts you in a weaker position where you have a debt that needs to be serviced and hanging over your head. Now, yes, I recognize that interest rates are really low these days, and that makes it all the more tempting and maybe makes it more reasonable. But I don’t know, in my world, I just wouldn’t go there. In my world, my savings rate is big enough that I have the capital to make those Roth conversions when the opportunity permits.
Steve: Okay, awesome. Appreciate the perspective. Next one, save a portion of every dollar you make.
JL: Yeah, right. That’s another way of saying don’t live paycheck to paycheck. If you want to be financially independent, if you want to have a F-you money, if you want to be free and have the widest possible choices in your life, you have to buy that freedom, and that you do by saving money. Sometimes I have people say to me, “Oh, you know, that just … it feels like deprivation. I’d rather spend the money.” My response is, we are spending money. You’re just buying your freedom. Instead of buying the fancier model of the car you want, you’re taking some of that money and buying your freedom. Now, it’s not my job, or even my position to tell anyone how they should spend their money, it’s their money, they can spend it however they choose.
JL: I would only suggest that you consider the possibility that one of the things you can buy with your money is your freedom. For me, speaking just personally, I can’t imagine anything I would rather have. So, that’s always the number one priority in my spending of my money, but I recognize, as we talked earlier, very few people have that priority. Most people, it’s their last priority and somehow never makes the list at the end of each month.
Steve: Oh, it gets important as they get … there’s a forcing function in people’s lives, where they get older, and eventually they’re probably going to stop making money from work, and they’re going to be faced with how are they going to finance a long, hopefully a long period of time post career.
JL: Well, even before that. When we hit hard economic times, which of course we regularly do, that’s the nature of the economy, almost inevitably, I’ll be watching the news on television and I’ll see some guy, and he’s probably in his mid to late 40s, and they’ll try him out, and he’ll say something like, I was a manager at X, Y, Z corporation for the last 20 years, and I just got laid off, and then three months I’m going to lose my house. I watch that and I think to myself, wait a second, you’ve had a managerial position for 20 years and you are so financially weak that you’re going to lose your house in three months. It’s hard for me to work up sympathy.
Steve: Right. Yeah, I hear you. This goes into the next one, the percent, so you say target 50% of every dollar saved that much money, if possible. I think also, within that, if you do that, theoretically, you can achieve financial independence in 14 years, is that right? Around that time?
JL: Yeah, something like the chart, somewhere between 12 and 14 years, it depends on how strong the wind is at your back with the stock market, what your returns are, but basically that. 50% is just the number that I randomly chose when I began my career, and it’s a perfectly doable number. My first professional job, I made $10,000 a year. This would’ve been in 1974, and I just looked at it as if I only brought in 5,000. That’s what I built my lifestyle around. That’s how I chose my apartment and everything else in my life. The other 5,000 went into investing. Then when I was making 12,000 a year, six and six, and 20, 10 and 10 and on up. So, I let my lifestyle increase as my income increased, but only at 50% of whatever that income was.
JL: I can imagine that for somebody who’s hearing this for the first time, and they’re say 35, and they’ve been out in the workforce for 10, 15 years, and has built up a certain kind of lifestyle, it can be hard to back away from that, and that’s tough, but that’s the choice you’re going to have to make in that situation. Also, there are people in the FI community who sneer at my 50%. There are some people who say “50%, nobody could ever do that.” Well, there are lots of people who snare at it and say, 50%, I’m doing 60%, 70%, 80%.” You can do whatever you choose to do. I just happened to choose 50%. If I’d been aware of other people doing this and somebody else said, “Jim, you could do 60 or 70, and there’s this goal that you get to even sooner,” I probably would’ve done something like that, but I didn’t have that kind of guidance.
Steve: I’m going to bundle up the next few because they’re around VTSAX, but basically it’s buy VTSAX, embrace the fact that is part of this equation, and it’s going to go down 30%, 40% some years, and shoot for living off of 2%. I know we talked about 4% earlier, but at that point, you’re kind of fully there, you’re fully independent. I’d love your color commentary on that.
JL: Yeah. Well, VTSAX, we already talked about, it’s the total stock market index fund. You’re basically betting on the American economy, you’re betting on America. So, if you believe that the United States has a future, and I do, then that’s about as good a bet worldwide as you can get anywhere. I recommend buying as much as you can whenever you can and holding it forever. Then regarding volatility, that’s one of the most important points to remember, is the way people lose money in the stock market is, when it takes one of its periodic drops, and it does on a regular basis, they panic and they sell, and then they lick their wounds and they’ve lost money, and they say, man, I’m never doing that again.
JL: Volatility in the stock market is a perfectly natural thing. When the market drops 10%, which is called a correction, that’s perfectly normal. When it props 20%, which is called a bull market, that’s a little rare, but it’s perfectly normal. When it drops 30%, 40%, 50%, and those are even rare, still those are called crashes, again, perfectly normal. Being surprised by this is like being surprised by hurricanes if you live in Florida, or snow storms if you live in New Hampshire. Now, that’s not to say that hurricanes and snowstorms and market crashes aren’t unpleasant and potentially damaging and harmful. They are, but you shouldn’t be surprised by them. By the same token, I say, if you can’t tolerate snow storms, then you need to leave New Hampshire.
JL: If you can’t tolerate hurricanes, you need to leave Florida, and if you can’t tolerate market volatility, periodic to be expected drops, then following my advice will leave you bleeding by the side of the road. Don’t do it. Find some other strategy that doesn’t involve the stock market. But if you’re willing to tolerate the stock market volatility, it will give you the best, most powerful wealth building tool that you have. Just like if you’re willing to tolerate hurricanes, there’s some pretty nice living Florida. If you’re willing to tolerate blizzards, there’s nice living in New England.
Steve: Yeah. Well, I think one of the big lessons from you that I have from 2016, which took me the four years to kind of get to was, there’s never … Timing the market is not a winning proposition. One thing you shared with me was that, 75% of the years three out four, the market goes up, and 25%, it goes down. But market, for the last, whatever 100 plus years has gone up into the right, keeps doing that because we, as an economy, keep increasing productivity, making more stuff, generating more wealth. You might as well hook yourself up to that train and go for it. But yeah, what would you say to people who are … because there are a lot of our audience, and I think everywhere, this is a common question. If people have money and it’s in cash, how do I get in the market or how should I think about that?
JL: Right. Well, first of all, I have a chapter in the book and a post on the blog, if people want to just read this on why I don’t like dollar cost averaging. As you alluded to the market, goes up 75% of the time. That translates into three out of four years. Again, it doesn’t go three years and then drop a year and then go up three years and drop a year. It’s not that reliable, or consistent. It can go up five, six years in a row and then be down two or three years in a row, but on average, and it’s impossible to predict what the market’s going to do. Most recently, in the spring with COVID, I had people on my blog commenting that this time is different than in March when the market had taken a 30, almost a 35% plunge, and they’re like, “This time is different. This is a pandemic. This is definitely going lower and it’s not coming back for years, if ever. I’m getting out and blah, blah, blah, blah.”
JL: I certainly didn’t know what the market was going to do, but I also knew these people didn’t know what the market was going to do either. It’s possible they could have been. There’s somebody predicting, at any given moment, anything the market can possibly do, and those people will be right just by sheer luck. Of course, as we know now, the market hit that 33%, 35% bottom, and then immediately turned around and shot right back up. I certainly didn’t know it was going to do that either. Nobody did. Nobody was predicting that. You can’t predict what the market’s going to do. The other thing to keep in mind is that once you’re invested in the market, you’re always subject to that big drop that you’re just going to have to live through.
JL: That’s the only way to deal with it, as we’ve talked about with just like, you’re going to have to live through hurricanes in Florida. If you have a chunk of money, the best thing to do is to put it to work right away. It’s possible that your timing could be bad, and the next day you wake up and the market’s down 30%. That’s unlikely, because those things don’t happen very often, but you have to be prepared for that. But even more importantly, over the years, it will happen once your money’s invested. That’s what I would say, is get too used to the fact that there is volatility in the market. If you want to participate in the upside, then get in the game as soon as possible. The old saying, the best time to plant a tree was 20 years ago, and the second best time is today/
Steve: Now. Yeah. Right. That’s awesome. Well, here’s my story. I did write down what we talked about and I created my own investment policy statement. I said, all right, this is how I’m going to invest. I’m going to do full in … I have a mix of passive active, but I’m going to go full index for any additional dollars, and then when the market corrected, I did, and I was posting this on Twitter. I was like, it kept going, going down, and I kept on buying, buying, buying, buying. I bought more, I bought more. Actually, lo and behold, that worked. Now my regret is I didn’t … I put a huge chunk of it in, but anyway, so your words had an effect. It took me a long time, but now I’m just going to out it and ignore everything.
JL: Yeah. Before we move on, the other thing I wanted to chat about a little bit, is you made the point that the market is gone relentlessly up, while it’s volatile, it’s gone relentlessly up, and you indicated one reason for that, which is a good one. But another reason that a fund like VTSAX total stock market index fund keeps going up is that it’s self cleansing. I’m proud of that term because I created it. What I mean by self cleansing is VTSAX holds virtually every publicly traded company in the US stock market. Last time I looked, that was about 3,600 companies. It doesn’t try to predict which companies are going to do better than other companies, it buys them on a market cap, weighted fashion, and we can talk about that if we need to, but it buys them without predicting what they’re going to do.
JL: Now, some of them are going to perform poorly, and ultimately, companies go out of business. So, some of those companies that are on the index will go out of business. They’ll probably actually drop off the index before that happens, because if they get too small, then they fall off the index, but they can have a pretty sharp drop. The most dramatic drop any stock can have, of course is 100%, and that’s pretty bad. On the other hand, there’ll be stocks in that index that rise. The interesting thing there is that they can certainly rise 100%, but they’re not limited to that. The downside is they can rise 200%, or 2000%. There’s literally no limit to the upside that the company can go. Even as companies that are failing or maybe just gotten to the end of their life cycle, and they’re drifting down, I’m thinking now of a company like Sears, as an example.
JL: There are new vital companies like Amazon that are growing up and that you’re participating in, and that cycle will always continue, and that self cleansing process is one of the things that allows VTSAX, while it’s volatile, like the market itself, to continue to march upwards.
Steve: Nice. No, I appreciate the color on that. I would love to know a little bit more color on your portfolio. You mentioned VTSAX, VBTLX, and then I think, do you have any other holdings right now, cash or? You talked about real estate at one point, but I think you got out of it, right?
JL: Well, we have, so we have this little vacation house that I’m talking to you from. It’s on the shores of Lake Michigan and turned out to be handy to have in this age of COVID to hide out in what otherwise nomadic and roaming around the world, but COVID has shut that down for the last few months. I guess I think of it as an investment, because when we’re not here, we rent it out. But other than that, we have have stock, which is about 80% in VTSAX, and then I think, and I haven’t looked in a while, but I think the bond position of VBTLX is about 17%, maybe 3% in cash. I think of cash and bonds as sort of being the same thing fundamentally in terms of my allocations. 20% in cash and bonds and 80% of the stocks is about where I like to be. That, by the way is, especially for a person, my age is considered very, very aggressive, but that’s … I’m comfortable with the volatility that brings on. I’m not suggesting that’s the right allocation for everybody. It’s just what I happened to do.
Steve: You capture the income, I mean, for your day-to-day living expenses, where does that come from? Dividends and …
JL: Yeah. Well, if you’re living on the portfolio right now, because of the book royalties and the blog income, our day-to-day income is coming from those things and has for the last three, four years now. I don’t see that as being secure income. The book sales have done … every year, they’ve gone up to migrate amazement, but I expect at some point, they’ll peak and begin to drift away, and I am writing less and less on the blog as I’ve gotten older. I’m expecting at some point the blog revenue will begin to drift away. That’s one of the reasons that I haven’t gone 100% stocks and lived on that income exclusively, because that income doesn’t feel reliable to me. I don’t know, maybe it’s more reliable and has better legs than I think.
JL: But anyway, once that income’s gone and living off the portfolio, sure, we would certainly have any dividends that I currently have reinvested, I’d have them paid out into the checking account and then I’d sell whatever number of shares I needed to sell in order to pay the bills. Again, keeping a close eye on that 4% benchmark.
Steve: Yeah. How many copies of the books have sold so far? Have you sold?
JL: Over 200,000.
Steve: Wow, that’s amazing. Nice.
JL: Nobody’s more amazing than I.
Steve: That’s awesome.
JL: It is. As I say, it sells better. This year is selling better than ever.
Steve: Well, there’s a strong word of mouth out there about the book. It’s in different languages too, right?
JL: Yeah, we actually … I have an agent now who’s done some international deals. The first was in Korean, South Korea, and it’s been published in Japan and Japanese, in China and Taiwan, and we just inked a deal with Russia, so it’ll be in Russian.
Steve: Wow, that’s awesome.
JL: It’s amazing how many communists countries are embracing my book.
Steve: All these index measures. Anything, so the Simple Path to Wealth, and we’ll link to it from the post on this, but anything you want to call out from the book that you think are especially important lessons for folks?
JL: Well, I think it’s … everything we’ve been talking about so far today is what’s in the book, and it’s written primarily for my daughter. She’s the audience I have in mind. She was the audience I had in mind when I started the blog, which really had its origins of just archiving information for her. What’s key about my daughter is that she doesn’t really care about this financial stuff. She’s not interested in this. She’s smart enough to know that she needs to understand it and get it right, because it will make her life enormously better, but it’s just not a topic of interest. Hence, I wanted to create a simple path that was simple to understand, simple to implement that you could put on autopilot. Just have to understand a couple of very simple things, get those right, put it on autopilot, which is basically buy VTSAX whenever you can, as much as you can. Keep your savings rate at least 50%, and otherwise, ignore it and don’t panic when it gets volatile.
JL: That’s the basic message. I’m always pleased to hear from readers who have benefited from the book under any circumstances, but the ones that particularly stand out to me are the ones who say something like, I’m really not interested in this, but for the first time reading your book, I understand it, and this is something I can do and have done. My response to that is, you’re just like my daughter. You’re the person I was writing for. Then of course, I get people who are interested in investing and they’re like, “Well, man, why don’t you tweak it this way or tweak it that way?” I actually have a post in the blog I wrote a year or so ago, maybe a little longer now called Too Hot, Too Cold, Not Pure Enough. I have people who say, “Oh, you’re not aggressive enough.” Then I have people who say, “You’re too aggressive.” I have people who’ve talked about socially responsible investing, so Too Hot, Too Cold and Not Pure Enough.
Steve: All right. We’ll check it out. Yeah, I think that what’s interesting is the whole financial services industry is typically paid in a non-transparent way. These fees that you can’t see and they don’t talk about. Change has to come from outside of it, from your book. I think our worldview is the same, like we’re sitting here cranking out this planning software out of our garages. We don’t make money on AUM. We offer tools for this, and then if you want to talk to an advisor, you can, but we only charge for time, any of that stuff. Because of that, we can speak completely independently about our point of view, because there’s nothing else, there’s no transaction fees or anything else, or AUM fees getting taken every year.
Steve: But it’s hard for … there’s a famous quote, I’m trying to look it up, but like, if a person is … if a man is compensated a certain one way, it’s really hard to get them to change their point of view on how to make money.
JL: Yeah. I can’t think of that quote either, but it’s a great one.
Steve: Yeah. They can rationalize a whole lot of things. I think that’s true for financial services. There is a lot of rationalization going on, but there’s like a famous financial advisor. They manage $130 billion or over 100 billion, and they charge 1%. They’re charging $1 billion in fees every year to their customers. I know Vanguard published on this. If you pay that kind of fee, you’re giving up 30% to 40% of your potential future total return because you lose the money every year, and you lose the potential compound returns on those returns that are raked out. And 1% sounds, I remember when I first got a job, the 401ks were coming out. Came in and talked about it, I’m like, yeah, it’s 1%. It’s not like 1% sounds like nothing. Right? It sounds super low, but you’re paying that 1% on your lifetime savings every year to somebody else. For what? If someone’s managing a fund and there’s guys managing it and it manages 100 million, it takes three guys. If it manages 5 billion, it could still be the same three guys. Are they earning that money?
JL: Yeah, no, you’re right. 1% seems like nothing but compounded over time, it’s significant. The other way to look at that 1%, so we talked about the 4% rule, which means you can comfortably pull 4% of your holdings each year to live on. Well, if you’re paying 1% of your holdings to a manager, that’s 25% of your potential income that has to pay that manager. Your other point’s well taken, that a lot of fees are buried and hidden. Financial managers typically do assets under management, which is they will charge a fee. It’s kind of hard to see that it’s going to be one to even decide it’s 2% for that. Then of course, so the underlying fees of whatever investments they put you in, so it can be really, even worse than we’re talking about.
JL: Others charge a commission for whatever they buy or sell on your behalf, or they collect a commission on whatever they buy or sell, and you tend not to see that as well. Then the third option is where they charge by the hour. Of course, it can be any combination of those three too. What’s interesting is customers are best served by those hourly fees, which are much more upfront and tend to be more modest over time, because they don’t compound over time, but they’re much less comfortable with them because those fees are much more obvious. You’re actually writing a check to someone. The other fees, which actually costs much more money, because they’re buried and the customer doesn’t see them as clearly, the customer, ironically enough, is more comfortable with them. I’ve had financial advisors say to me, “I’m only doing what my customer is most comfortable with,” and there’s some truth to that.
Steve: For sure. Well, we’d surveyed our users and we saw the same thing. 30%, 40% of people were like, fine, I’ll pay AUM fees, even though it’s like, hey, this is a lot more expensive. But we also get users saying, hey, I’ve been saving my money for my whole life, and now I’ve got a couple million bucks, I’m headed towards retirement. I’m doing the math, that’s like 20,000 a year in fees, and they’re kind of like, hmm, that’s a couple nice vacations or whatever it is, a new car. I think there is a growing awareness that these fees aren’t cheap and people need to be smart about it. I know we’ve gone over our lot of time here, but any last thoughts in terms of what’s next or people that you really like in the space that our audience could benefit from. I know you mentioned Mr. Money Mustache but anyone else?
JL: Yeah. Mr. Money Mustache is great. He talks primarily about organizing your life in such a fashion that you free up, and by effect, you wind up freeing up money that you can then invest. I’ve often thought of him as kind of being how you organize your life. Then once you do that and you freed up the money, I talk about how to invest it. Kristy and Bryce from Millennial Revolution do a great job. With that, I mean, there’s so many to name, with their book, Quit Like a Millionaire. I hesitate going any further because I’m going to admit so many great voices that are out there.
Steve: Yeah. Fair enough. We don’t have to go through everyone, but I know you’ve inspired many of them, and it’s awesome that you got your book written, and you self-published it too, right?
JL: I did. I did.
JL: I self published it. The audio version, as I mentioned earlier on the international deals, I have an agent, Anna by name, and I first worked with Anna, she negotiated the deal on the audible version of the book, but the Kindle and the print version, I, myself published. I think I brought up the audible version maybe a year later, something like that.
Steve: Okay. Cool. We’ll have to link to that. JL, I really appreciate your time and thanks for coming on our show. Thanks Davorin Robison for being our sound engineer. Anyone listening, thanks for listening. Hopefully you found this useful. Our goal at NewRetirement is to help anyone plan and manage their retirement so they can make the most of their money on time. If you made it this far, I encourage you to check out jlCollinsnh.com, his Google talk as well, and his book, The Simple Path to Wealth. We’ll link to all of them from this podcast. Then finally, we’re trying to build the audience for this podcast, so any reviews are welcome. We do read them and try to adapt as we go. With that, thank you and have a great day
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