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