"The Simple Path to Wealth" -- A Gem

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Taylor Larimore
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"The Simple Path to Wealth" -- A Gem

Postby Taylor Larimore » Mon Oct 24, 2016 10:27 pm

Bogleheads:

JL Collins has written a book that Bogleheads will love. He values simplicity and unabashedly recommends Vanguard and it's total market index funds. He maintains a popular blog here.

Below are valuable excerpts from his recent book, "The Simple Path to Wealth":
For my money (no pun intended), no one has done more for the individual investor than Mr. Bogle. From launching Vanguard and its unique structure that benefits shareholders, to creating index funds; he is a Titan in the financial industry, an investing saint and a personal hero.

Jack Bogle founded the Vanguard Group in 1974. He is the creator of the modern low-cost index fund and my personal hero. If you aspire to be wealthy and financially independent, he should be yours as well.

Before Mr. Bogle, the financial industry was set up almost exclusively to enrich those selling financial products at the expense of their customers. It mostly still is.

This book is such a strong proponent of Vanguard it is reasonable to ask: "Am I on the take?" Nope. Vanguard doesn't know I'm writing this and they are not an advertiser on my blog. Nor do they pay me in any fashion whatsoever.

The idea that with a little more effort and smarts in the selection of individual stocks and/or actively managed funds, more diligent folks can do better -- Rubbish!

What is so simple and clear now, I personally had to learn the hard way, and it took decades. -- I wasted years and many thousands of dollars in the vain pursuit of out-performance.

The beauty of a high savings rate is two fold: You learn to live on less even as you have more to invest.

Money can buy many things, but nothing more valuable than your freedom.

When you can live on 4% of your investments per year, you are financially independent.

1975 is the year Jack Bogle launched the world's first index fund. From January 1975-January 2015, the market returned an average of 11.9% per year. That is a breathtaking number ($12,000 invested in 1975 would be worth a cool million today).

I am not for a moment suggesting that you can count on 11.9% annual returns in planning for your future. -- Nobody can predict the future precisely.

Debt is the vicious, pernicious destroyer of wealth-building potential. You are enslaved to whatever source of income you have.

Seek the least house to meet your needs rather than the most house you can technically afford.

Unlike other kinds of debt, as truly awful as they are, you can never walk away from your student loans.

Here's the simple formula for your financial independence: Spend less than you earn--invest the surplus--avoid debt.

If your lifestyle matches or exceeds your income, you forfeit your hopes of financial independence.

Stop thinking about what your money can buy. Start thinking about what your money can earn. And then think about what the money it earns can earn.

If I were to seek absolute security (a very different thing that the smooth ride most mistake for safety), I'd hold 100% in VTSAX (/vanguard Total Stock Market Index Fund) and spend only the ~2% dividend it throws off.

It is simply not possible to time the market, regardless of all the heavily credentialed gurus on CNBC and the like who claim they can.

The market always goes up and it is always a wild and rocky ride along the way. Crashes, pullbacks and corrections are all absolutely normal. Since we can't predict these swings, we need to toughen up mentally and ride them out.

"Simplicity is the keynote of all true elegance." Coco Chanel quote.

The market is the single best performing investment class over time, bar none.

Most people lose money in the stock market. Here's why:
1. We think we can time the market.
2. We believe we can pick individual stocks.
3. We believe we can pick winning mutual fund managers.
4. We focus on the foam (traded pieces of paper that furiously rise and fall).

The stock market is a wonderful wealth-building tool that moves relentlessly upward. Vanguard's Total Stock Market Index Fund is the only tool we need to access it.

Isn't investing complicated? Don't I need professionals to guide me? --- No and no.

Simple is good. Simple is easier. Simple is more profitable.

The three (portfolio) tools: Stocks (VTSAX); Bonds (VBTLX); Cash (VMMXX) or Bank).

Over periods of 15 to 30 years, the index will outperform 82% to 99% of actively managed funds. This means just buying a total stock market index fund like VTSAX guarantees you'll be in the top performance tier year after year.

Letting an index work its magic over the years isn't very exciting. It is only very profitable.

If 1% of your money is going to management fees, that is a full 25% of your income.

There is a huge business dedicated to selling advice and brokering trades to people who can be persuaded to believe they can outperform. Money managers, mutual fund companies, financial advisers, stock analysts, newsletters, blogs, and brokers all want their hand in your pocket.

The subject of bonds is a BIG topic. The details are endless. In the simplest terms: When you buy stock you are buying a part ownership in a company. When you buy bonds you are loaning money to a company or government agency.

Since we own our bonds in VBTLX (Vanguard's Total Bond Index Fund) most of the risks in owning individual bonds go away. All our investment grade. This reduces default risk. Widely differing maturity dates mitigate interest rate risk. The fund holds bonds across a broad range of terms, reducing inflation risk.

VTSAX (Vanguard Total Stock Market) is an index fund. It is 'self-cleansing.' The failures fall away and the winners can grow endlessly.

Rebalancing is simple and can be done online with Vanguard or most other investment firms. But like changing the oil in your car, it is critical that you actually do it. If you are unsure you'll remember to rebalance or simply don't want to be bothered, Target Retirement Funds are a fine option.

When buying or selling ETFs, just like a stock, commissions and/or spreads are frequently involved.

If your tax-advantaged, employer-offered plan doesn't offer Vanguard you should still participate, certainly at least up to the amount needed to capture any employer match. Once you leave that employer you can easily roll your investments into an IRA with Vanguard.

The good news is that -- due to the competitive pressure from Vanguard -- nearly every other major mutual fund company now offers low-cost index funds.

Bogle's brilliance, for us investors, was to shift the ownership of his new company to the mutual funds it operates. Since we investors own those funds, through our ownership of shares in them, we in effect own Vanguard. -- Your interests and those of Vanguard are precisely the same. This is a rare and beautiful thing, unique in the world of investing.

For anyone serious about achieving financial independence, taking full advantage of all your tax-deferred opportunities is a must.

TSPs (Government Thrift Savings Plans): Unlike the fee-heavy cesspool too many 401(k) plans have become, a TSP offers a nice--but not overwhelming--selection of very low-cost index funds.

Anyone using a high-deductible insurance plan should fund an HSA The benefits are simply too good to ignore.

Fund your employer retirement plan up to the company match. Then turn to your personal IRA. Once that's fully funded, turn again to your employer plan up to the maximum.

An income of $35,000 puts you in the top .81% of world incomes.

Investing only seems complex because the financial industry goes to great lengths to make it seem complex.

Advisors are expensive at best and will rob you at worst. An advisor's interests and that of their clients are in opposition. To do what's best for the client requires the advisor to do what is not best for himself. It takes a rare and saintly person to behave this way.

Not surprisingly, a field that provides access to people's life savings is a magnet for con men, thieves and grifters.

Annuities and whole/universal life insurance carry commissions as high as 10%. Worse, these commissions are buried in the investment so you never see them. How such fraud is legal I can't say. But it is.

Suppose you have a nest egg of $100,000. Let's further suppose you invest it for 20 years and earn 11.9% per year which as we've seen is the average annual return of the past 40 years. You end up with $947,549. Not bad. Now suppose you give up 2% for these annual gains to a management fee. Your net return is now 9.9% and after 20 years that yields $660,623. That's a whopping $286,926 less.

If you are a novice investor you have two choices: 1) You can learn to pick an advisor. 2) You can learn to pick your investments. Both require effort and time. But the second not only provides better results, it is the easier and less expensive path.

Wall Street is endlessly creating new products and schemes to sell you, even as they systematically and quietly close those that have failed (which serves to make their track record seem better). But make no mistake, the objective is always to line their pockets, not yours.

The great irony of successful investing is that simple is cheaper and more profitable. Complicated investments only benefit the people and companies that sell them.

The market always goes up but it is a wild ride. -- Between 1970 and 2013, the market was up 33 out of 43 years. That's 77% of the time.

With dollar cost averaging you are betting that the market will drop, saving yourself some pain. For any given year the odds of this happening are only ~23%. But the market is about 77% more likely to rise, in which case you will have spared yourself some gain.

If it looks too good to be true, it is. There is no free lunch. Not ever. Your Mama taught you this. She was right.

Make no mistake. You can be conned. So can I. Many of Bernie Madoff's victims were financial professionals.

If you have been following the simple path described in this book--you will be able to choose to have your assets pay the bills rather than your labor.

As the winds change, so will my withdrawals. I suggest the same for you.

One more reason I'm a fan of index funds. I want to leave my wife with a simple portfolio she can leave on auto-pilot.

I'm realistic enough to know most people are goofs with their money. Without Social Security many would be back to living on cat food.

Social Security is backed by the most powerful lobby in history: AARP.

You already know I'm a huge fan of Vanguard. So it should be no surprise that in setting up our foundation we use The Vanguard Charitable Endowment Program.

Don't get trapped by an expanding lifestyle or unwind it if you already are.

Being financially independent is every bit as much about controlling your needs as it is about building your assets.

The Dow Jones started the last century at 68 and ended at 11,497 (not including dividends). That was through two world wars, a deflationary depression, bouts of high inflation and countless smaller wars and fiscal disasters.

The Simple Path to Wealth contains detailed information, too lengthy to quote, about the Trinity Study, Social Security, tax-advantaged retirement plans, withdrawal strategies, Required Minimum Distributions, charity deductions, asset-allocation, etc..

Thank you Mr. Collins!

More Investment Gems

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "The Simple Path to Wealth" -- A Gem

Postby jjface » Mon Oct 24, 2016 10:43 pm

I found the book pretty much exactly what he has on his blog - the 'stock series'. That is not necessarily a bad thing but you might as well save your money and just read the blog series.

I thought it was reasonable but not fantastic. There are better out there. He is a biased towards 100% stocks and no international investing. Not enough focus on risk. The particular style and humour were not my thing either.

I can see it appealing to some people though so do take a look at his blog.

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Re: "The Simple Path to Wealth" -- A Gem

Postby Jazzman » Mon Oct 24, 2016 10:53 pm

Thank you very much, Taylor.

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Re: "The Simple Path to Wealth" -- A Gem

Postby rosylenm » Mon Oct 24, 2016 11:37 pm

Thanls for the reminder. My SO is talking with a friend who is by all means financially savvy, but i cringed at his recommendations for purchasing individual stocks.

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Re: "The Simple Path to Wealth" -- A Gem

Postby ofcmetz » Tue Oct 25, 2016 3:34 am

Thank you for sharing those gems Taylor. Sounds like a book worth reading.
Never underestimate the power of the force of low cost index funds.

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Re: "The Simple Path to Wealth" -- A Gem

Postby ljb1234 » Tue Oct 25, 2016 6:53 am

That was a very good read.

What do you think about this statement?

"If I were to seek absolute security (a very different thing that the smooth ride most mistake for safety), I'd hold 100% in VTSAX (/vanguard Total Stock Market Index Fund) and spend only the ~2% dividend it throws off."

Since the Total Bond Index also generates a similar dividend, I would argue that a blend of the two would provide security and safety (and a similar return) for less risk. I did not read the full reference yet.

regards.

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Re: "The Simple Path to Wealth" -- A Gem

Postby Crushtheturtle » Tue Oct 25, 2016 7:58 am

ljb1234 wrote:That was a very good read.

What do you think about this statement?

"If I were to seek absolute security (a very different thing that the smooth ride most mistake for safety), I'd hold 100% in VTSAX (/vanguard Total Stock Market Index Fund) and spend only the ~2% dividend it throws off."

Since the Total Bond Index also generates a similar dividend, I would argue that a blend of the two would provide security and safety (and a similar return) for less risk. I did not read the full reference yet.

regards.


I believe that spending only the dividends of a 100% equity portfolio is considered safe because you are never touching the "principal," and so your portfolio is never at risk. (Assuming a meteor doesn't strike the Earth causing Total Market Index Fund dividends to fall to zero).

Bonds would provide better "risk-adjusted" return, but with no risk, they would only serve to drag down total expected return over the long-term.

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Re: "The Simple Path to Wealth" -- A Gem

Postby SeeMoe » Wed Oct 26, 2016 10:21 am

If one already has jaundiced (biased) views regarding international stocks and bonds, then the authors views will just reinforce that thinking. Collins does make some good points though regards USA based global companies and owning them vs international companies not based in the USA causing more unnecessary risk and expenses. Makes me consider cutting back my 38+% in international stocks, and 22+% in international bonds folios! Maybe to what Collins says other investment firms recommend...Interesting article overall.

SeeMoe.. :idea:
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

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Re: "The Simple Path to Wealth" -- A Gem

Postby Que1999 » Wed Oct 26, 2016 1:37 pm

Just got this book, and am thoroughly enjoying it. I've had to slow myself down because if not it will be done in 2 days, I like to savor my books. For those with Amazon Prime it seems to be a free 'lending' book thru Kindle. Although I'm sure I'll plunk down the cash to support the author, it seems to be well worth it.

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Re: "The Simple Path to Wealth" -- A Gem

Postby snowman » Wed Oct 26, 2016 1:53 pm

I rented the book from my local library, mostly because I enjoy author's blog (though I rarely visit) and his writing style and wanted to see how this translates into book-writing. I have to say that I was impressed, and that the book is even better than his blog. It's very well written, entertaining, and informative. Highly recommended!

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Re: "The Simple Path to Wealth" -- A Gem

Postby Katie » Wed Oct 26, 2016 3:28 pm

Thank you, Taylor. It sounds like it might be a good book for my nephew who is graduating from college and just starting his financial life.

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Re: "The Simple Path to Wealth" -- A Gem

Postby friar1610 » Wed Oct 26, 2016 9:39 pm

Thanks for the gems AND the link to Mr. Collins' blog. I've been working my way through it and really like it. Very Bogleheadish yet with a different spin on some things. Good stuff; thanks again!
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Re: "The Simple Path to Wealth" -- A Gem

Postby saltycaper » Wed Oct 26, 2016 11:32 pm

Hmm. Surprised at the positive reviews given what are, IMO, a number of misleading or foolhardy statements in the excerpts. On the one hand, I want to see if the author vindicates himself with context. On the other hand, it makes me doubt it would be worth the time.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: "The Simple Path to Wealth" -- 5-stars

Postby Taylor Larimore » Thu Oct 27, 2016 7:57 am

saltycaper wrote:Hmm. Surprised at the positive reviews given what are, IMO, a number of misleading or foolhardy statements in the excerpts. On the one hand, I want to see if the author vindicates himself with context. On the other hand, it makes me doubt it would be worth the time.

saltycaper:

"The Simple Path to Wealth" currently has 227 customer reviews at Amazon giving the book a rare 5 Stars for financial books.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "The Simple Path to Wealth" -- 5-stars

Postby saltycaper » Thu Oct 27, 2016 8:05 am

Taylor Larimore wrote:
saltycaper wrote:Hmm. Surprised at the positive reviews given what are, IMO, a number of misleading or foolhardy statements in the excerpts. On the one hand, I want to see if the author vindicates himself with context. On the other hand, it makes me doubt it would be worth the time.

saltycaper:

"The Simple Path to Wealth" currently has 227 customer reviews at Amazon giving the book a rare 5 Stars for financial books.

Best wishes.
Taylor


We should hold authors to a higher standard here on the forum than reviewers do on Amazon. Again, I'm just going by the excerpts you posted.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: "The Simple Path to Wealth" -- 5-stars

Postby friar1610 » Thu Oct 27, 2016 5:39 pm

saltycaper wrote:
Taylor Larimore wrote:
saltycaper wrote:Hmm. Surprised at the positive reviews given what are, IMO, a number of misleading or foolhardy statements in the excerpts. On the one hand, I want to see if the author vindicates himself with context. On the other hand, it makes me doubt it would be worth the time.

saltycaper:

"The Simple Path to Wealth" currently has 227 customer reviews at Amazon giving the book a rare 5 Stars for financial books.

Best wishes.
Taylor


We should hold authors to a higher standard here on the forum than reviewers do on Amazon. Again, I'm just going by the excerpts you posted.


As one who posted generally positive comments after reviewing Mr. Collins' web site, I'm curious what standards I should strive to meet before posting in the future?
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Re: "The Simple Path to Wealth" -- A Gem

Postby Gronnie » Thu Oct 27, 2016 5:48 pm

Purchased this book back in June -- I highly recommend it.

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Re: "The Simple Path to Wealth" -- 5-stars

Postby saltycaper » Fri Oct 28, 2016 3:25 am

friar1610 wrote:
As one who posted generally positive comments after reviewing Mr. Collins' web site, I'm curious what standards I should strive to meet before posting in the future?


Not sure what you mean. I was referring to book authors, not the majority of us who post to this forum. I think anyone should be able to post to this forum. If they post incorrect information, usually someone will object, though not always. If the topic is a matter of debate, usually a debate will ensue, though not always.

So, what are my beefs with the excerpts? Here are some: Markets don't always go up; you cannot access the entire stock market through Vanguard's Total Stock Market Index Fund; investing in VTSAX does not guarantee you will be "in the top performance tier year after year"; holding a bond fund consisting of bonds with different maturities does not in itself reduce interest rate or inflation risk; VTI can be traded commission-free and has a trivial spread; the fact that an investment has had an average annual return of x% does not mean you would have earned x% per year; and spending the dividends of VTSAX does not provide "absolute security". And this is just using the quotes appearing in this thread. Some of these statements may be papered over with other arguments or set within a context that might reduce my beef with what's posted in this thread, but others, especially the dividend example, are really disqualifying, IMO. Just look at the further confusion it's caused in this thread alone.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: "The Simple Path to Wealth" -- A Gem

Postby saltycaper » Fri Oct 28, 2016 3:38 am

Crushtheturtle wrote:
ljb1234 wrote:That was a very good read.

What do you think about this statement?

"If I were to seek absolute security (a very different thing that the smooth ride most mistake for safety), I'd hold 100% in VTSAX (/vanguard Total Stock Market Index Fund) and spend only the ~2% dividend it throws off."

Since the Total Bond Index also generates a similar dividend, I would argue that a blend of the two would provide security and safety (and a similar return) for less risk. I did not read the full reference yet.

regards.


I believe that spending only the dividends of a 100% equity portfolio is considered safe because you are never touching the "principal," and so your portfolio is never at risk. (Assuming a meteor doesn't strike the Earth causing Total Market Index Fund dividends to fall to zero).

Bonds would provide better "risk-adjusted" return, but with no risk, they would only serve to drag down total expected return over the long-term.


Your 100% equity portfolio (presumably VTSAX in this case) absolutely would be at risk even if you only spent the dividend, as the dividend reduces the value of the fund by the same amount that is paid. Whether the fund pays a 0% dividend and you sell 2% of shares or the fund pays a 2% dividend and you sell 0 shares, they are essentially the same thing, ignoring taxes. If you search the forum for "dividends", you will find lengthy discussions on the topic.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: "The Simple Path to Wealth" -- A Gem

Postby Explorer » Fri Oct 28, 2016 6:00 am

SeeMoe wrote:If one already has jaundiced (biased) views regarding international stocks and bonds, then the authors views will just reinforce that thinking. Collins does make some good points though regards USA based global companies and owning them vs international companies not based in the USA causing more unnecessary risk and expenses. Makes me consider cutting back my 38+% in international stocks, and 22+% in international bonds folios! Maybe to what Collins says other investment firms recommend...Interesting article overall.

SeeMoe.. :idea:


My own "sleep well" portfolio includes 10% int'l stocks and 10% int'l bonds.. I tend to agree that we don't need a LOT of int'l stocks & bonds to acieve our goals.

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Re: "The Simple Path to Wealth" -- 5-stars

Postby friar1610 » Fri Oct 28, 2016 7:51 am

saltycaper wrote:
friar1610 wrote:
As one who posted generally positive comments after reviewing Mr. Collins' web site, I'm curious what standards I should strive to meet before posting in the future?


Not sure what you mean. I was referring to book authors, not the majority of us who post to this forum. I think anyone should be able to post to this forum. If they post incorrect information, usually someone will object, though not always. If the topic is a matter of debate, usually a debate will ensue, though not always.

So, what are my beefs with the excerpts? Here are some: Markets don't always go up; you cannot access the entire stock market through Vanguard's Total Stock Market Index Fund; investing in VTSAX does not guarantee you will be "in the top performance tier year after year"; holding a bond fund consisting of bonds with different maturities does not in itself reduce interest rate or inflation risk; VTI can be traded commission-free and has a trivial spread; the fact that an investment has had an average annual return of x% does not mean you would have earned x% per year; and spending the dividends of VTSAX does not provide "absolute security". And this is just using the quotes appearing in this thread. Some of these statements may be papered over with other arguments or set within a context that might reduce my beef with what's posted in this thread, but others, especially the dividend example, are really disqualifying, IMO. Just look at the further confusion it's caused in this thread alone.


Rereading your earlier post IVO the above I get what you meant. I misread it as your saying that posters here should be held to a higher standard than reviewers on Amazon should. My mistake.
Friar1610

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Re: "The Simple Path to Wealth" -- A Gem

Postby cjking » Fri Oct 28, 2016 7:55 am

saltycaper wrote:Your 100% equity portfolio (presumably VTSAX in this case) absolutely would be at risk even if you only spent the dividend, as the dividend reduces the value of the fund by the same amount that is paid.


The reason your VTSAX portfolio is (in a sense) not at risk if you spend only the dividend is that only about half of profits are paid out as dividends, so your withdrawal rate is well below the underlying rate of return, and unless bad luck with the speculative component of returns outweighs the growth from reinvested profits, your portfolio balance is like to rise with time.

If company profits go up or down, it's likely that dividends will rise or fall proportionately, so you are taking an income that adjusts to changing returns, in addition to being significantly below underlying returns.

For your portfolio to be at risk from spending dividends, it would have to be one where the dividends were higher than returns. A 100% REIT portfolio might be an example of this. (I don't follow US REITs so not certain if it is true for them, but it used to be true of UK ones, when I followed them more closely than I do now.)

While at the moment it does seem to be generally the case across the world that dividends are about half of earnings, I think they used to be higher in the US, so there's no guarantee they will stay at half. So people following a dividend strategy should keep an eye on earnings as well, just in case there's some bizarre scenario where corporations suddenly collectively decide to run their value down.

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Re: "The Simple Path to Wealth" -- A Gem

Postby stemikger » Fri Oct 28, 2016 9:12 am

Thanks Taylor. I just read Jim's book and loved it.
Press on Regardless! Just buy the Vanguard Balanced Index Fund and get on with it!!

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Re: "The Simple Path to Wealth" -- A Gem

Postby SeeMoe » Fri Oct 28, 2016 9:46 am

Explorer wrote:
SeeMoe wrote:If one already has jaundiced (biased) views regarding international stocks and bonds, then the authors views will just reinforce that thinking. Collins does make some good points though regards USA based global companies and owning them vs international companies not based in the USA causing more unnecessary risk and expenses. Makes me consider cutting back my 38+% in international stocks, and 22+% in international bonds folios! Maybe to what Collins says other investment firms recommend...Interesting article overall.

SeeMoe.. :idea:


My own "sleep well" portfolio includes 10% int'l stocks and 10% int'l bonds.. I tend to agree that we don't need a LOT of int'l stocks & bonds to acieve our goals.


Okay, that's your sleep-well folio and if it feels right to you then stick with it.
This article got me to thinking about taxes and we are gonna owe some extra this year due to selling some real estate at the shore , and other stuff. So I re-read a recent Boglehead article regards TAX LOSS HARVESTING and then exchanged(sold) some total international stock over to a tax exempt fund for a tax loss that should help my tax bill a lot. This has reduced my age 70+ retiree folio to 43/57 , and I want to eventually get it (folios) to 40/60. Exchanged some total international bond over to a total bond index too in an IRA.
So now my international holdings are 33% in stock and 16% in bonds in our Flagship accounts. Feels ok ,...for now.

SeeMoe.. :beer
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Re: "The Simple Path to Wealth" -- A Gem

Postby saltycaper » Fri Oct 28, 2016 11:40 am

cjking wrote:
The reason your VTSAX portfolio is (in a sense) not at risk if you spend only the dividend is that only about half of profits are paid out as dividends, so your withdrawal rate is well below the underlying rate of return, and unless bad luck with the speculative component of returns outweighs the growth from reinvested profits, your portfolio balance is like to rise with time.

If company profits go up or down, it's likely that dividends will rise or fall proportionately, so you are taking an income that adjusts to changing returns, in addition to being significantly below underlying returns.

For your portfolio to be at risk from spending dividends, it would have to be one where the dividends were higher than returns. A 100% REIT portfolio might be an example of this. (I don't follow US REITs so not certain if it is true for them, but it used to be true of UK ones, when I followed them more closely than I do now.)

While at the moment it does seem to be generally the case across the world that dividends are about half of earnings, I think they used to be higher in the US, so there's no guarantee they will stay at half. So people following a dividend strategy should keep an eye on earnings as well, just in case there's some bizarre scenario where corporations suddenly collectively decide to run their value down.


The earnings are what matter, as you state--not the dividends. The dividends are irrelevant to determining what is "safe" to withdraw. Folks have tried to point this out repeatedly in many threads, so I'm not going to try to re-hash the debate here, but as an aside, I think your statement that dividends are likely to rise and fall proportionately with profits is incorrect. Companies sometimes even will borrow money to maintain their dividend, despite falling profits. Conversely, they may buy back stock instead of increasing their dividend, even though earnings are up, or they may hoard cash or expand. Worrying about either case may be avoided by simply ignoring dividends entirely, except when it comes to tax planning.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

jjface
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Re: "The Simple Path to Wealth" -- A Gem

Postby jjface » Sat Oct 29, 2016 1:06 am

I think any book that recommends 100% stocks is dangerous - especially one meant for beginners. A lot of these bloggers are 100% stocks and maybe they can handle it but not many others. A lot started their blogs after 2008 too. Not sure when this one started.

GuitarXM
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Re: "The Simple Path to Wealth" -- A Gem

Postby GuitarXM » Sat Oct 29, 2016 2:14 am

Its interesting that he doesn't like the concept of Dollar Cost Averaging?
What do you guys think about it?

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raven15
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Re: "The Simple Path to Wealth" -- A Gem

Postby raven15 » Sat Oct 29, 2016 11:27 am

GuitarXM wrote:Its interesting that he doesn't like the concept of Dollar Cost Averaging?
What do you guys think about it?

He means that if you have a bunch of money, most likely you will be best off putting it all in the market now instead protracted small additions because the stock market usually goes up. Usually but not always correct. Obviously if you don't have money now but will gradually earn it then DCA will work for you.
It's Time. Adding Interest.


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