Jim (JL) Collins is a fellow blogger, and the author of a recent book titled “The Simple Path to Wealth.”
The Simple Path to Wealth is a personal finance book, full of valuable information on avoiding debt, saving, and investing. But more than that, it’s about using money to buy freedom. Here is a quote from Jim on the relationship between money and freedom:
For me (Jim), the pursuit of financial independence has never been about retirement. I like working and I’ve enjoyed my career. It’s been about having options. It’s been about being able to say “no.” It’s been about having F-You Money and the freedom it provides. It’s a big beautiful world out there. Money is a small part of it. But F-You Money buys you the freedom, resources and time to explore it on your own terms.
Money can buy many things, none of which is more important than your financial independence.
That’s a message that resonates in Jim’s life, and in our own. As long-time readers know, we are debt-free, and have a very high savings rate. Jim advocates a similar approach to money management, and it goes something like this:
- Avoid (and eliminate) debt
- Spend less than you earn (increase your savings rate)
- Invest your savings in low-cost index funds
- Ignore the financial news — and manage your own financial life
Jim talks about good debt and bad debt.
According to Jim, if you borrow, and use the money to buy a depreciating asset (any consumer good, cars, some homes, etc.), you now have some bad debt.
Good debt comes from borrowing to invest in an appreciating asset (some educational training, some homes, some businesses, etc.).
I generally agree with Jim’s assessment of debt. Being debt-free is obviously the optimal solution, but that’s not always possible.
This is a rather straightforward message – Spend less than you earn. But Jim does an excellent job explaining that saving is more about your mindset than anything else.
You always have two options when it comes to your earned income:
- Spend it now on any number of available market goods
- Save it, invest it, and spend the earnings later
Jim’s main point is that the second option is far superior. If you learn how to delay gratification, you can make your money work for you. Or in the words of Jim, “Stop thinking about what your money can buy. Start thinking about what your money can earn.”
I tend to agree with Jim’s assessment, because multiple studies have shown that most Americans fail to save.
This section also got me thinking about finding balance in the decision to save or spend. On one hand, saving and deferring consumption can obviously lead to more wealth, which provides freedom for your future self. On the other hand, it’s equally important to avoid skimping and pinching every penny. If you continually save, save, save, only to reach old age and have millions in the bank, are you really better off? Or, could you have taken that occasional family vacation, purchased a bigger TV to enjoy movie nights, or enjoyed a newer home while still being fiscally responsible?
It’s a tough line to walk.
Jim’s advice on investing can be summarized as “Simple is good. Simple is easier. Simple is more profitable.”
That means index investing as follows: One index fund to track the entire U.S. stock market, and one index fund to track the entire U.S. bond market.
The result is a well-diversified, low-cost portfolio that is easy to manage. This is surely an acceptable approach, but there is a tradeoff between simplicity and completeness when it comes to investing.
Harry Markowitz is the father of Modern Portfolio Theory. In his seminal 1952 paper, he mathematically showed that you can reduce the volatility of a portfolio by combining non-perfectly correlated financial assets. Combining any assets with less than a perfect correlation results in a reduction of idiosyncratic risk.
How does this apply to Jim’s advice?
It means you can (slightly) reduce the expected risk of Jim’s portfolio by adding other index funds. Yes, you get some international exposure from large-cap U.S. equities, but it is not sufficient. There are further diversification benefits to be had. Emerging and developed international stocks and bonds are readily available via low cost index funds, as are international and domestic REITs. Allocating even a small percentage of the portfolio to these funds will reduce expected volatility. The downside is that international index funds often carry slightly higher expense ratios (in the ballpark of 0.05% higher annually).
Either way, Jim does an excellent job presenting the benefits of index investing, and leaves readers with a very simple, low-cost portfolio recommendation.
DIY vs Outsourcing
Jim’s general advice is to avoid financial advisors, gurus, and salespeople. Instead, Jim suggests that you should learn to manage your own finances.
For the most part, I agree. Anyone can be a financial advisor. There is no minimum level of education, and no required licenses or certifications. And because of that, the industry is filled with individuals who have very little human capital. They prey on unsophisticated investors who are looking for financial help.
Because Jim advocates simplicity, I believe that many readers should consider outsourcing portfolio management to these low-cost providers. Instead of attempting to construct and maintain a portfolio, you can pay 0.15-0.25% annually for professional management. This includes a diversified portfolio comprised of international and domestic index funds, plus a slew of other features like tax-loss harvesting.
The Simple Path to Wealth is very much a book worth reading. It’s full of relevant stories and simplified financial advice.
But more than that, it’s written by an individual who has walked the walk. Jim has followed his own advice for many years. The result is a life of abundance and freedom.
If you get the chance, grab a copy and read it. Then pass it along to someone else who might benefit.