JL Collins - The Simple Path to Wealth

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Fish
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JL Collins - The Simple Path to Wealth

Post by Fish » Tue Jun 13, 2017 3:05 pm

Finally read this after a 2-month wait at my library. It's essentially the Stock Series in book form, so if you've read that, you know the material. It's more of an investing book rather than an early retirement book. Furthermore it is geared towards those who know little about personal finance. A beginner book, though a good one at that. If you are expert-level there is relatively little to gain.

Although I consider JL Collins a FIRE blogger, he presents the goal as financial freedom (FU money) and not really FI, though there is a section about Trinity and long-term sensitivity of portfolio balance to asset allocation. One thing I found somewhat distracting is the use of 11.9% CAGR (S&P500 1975-2015, dividends reinvested, ignore inflation) to illustrate his points. However, looking past that, the book was valuable for understanding how a wealthy person thinks about investing and short-term market drops.

What I appreciated was the section on tax-advantaged retirement accounts. It's highly US-centric but more detail than is usually given in a PF book, along with some suggestions.

The "plan" in TSPW can be summarized as follows:
1. Save half of your pre-tax income. Figure out how to live on what's left over. (Exercise for the reader)
2. Avoid debt.
3. Invest in the great wealth engine that is the US stock market and stay the course.

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BRUTE
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Re: JL Collins - The Simple Path to Wealth

Post by BRUTE » Tue Jun 13, 2017 3:27 pm

brute found the book (and the stock series) a bit disappointing. it's not that his concepts aren't true, but they are so confidently presented as The Only Way (tm) that they almost reach a Tim Ferriss-level of eye rolling.

brute's summary:
1.max 401(k)
2.50%+ SR -> VTSAX
3.profit

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Re: JL Collins - The Simple Path to Wealth

Post by GandK » Tue Jun 13, 2017 4:55 pm

BRUTE wrote:
Tue Jun 13, 2017 3:27 pm
brute found the book (and the stock series) a bit disappointing. it's not that his concepts aren't true, but they are so confidently presented as The Only Way (tm) that they almost reach a Tim Ferriss-level of eye rolling.
This was G's take also. I believe the word he used was "pompous." The tone really drowned out the message for him. He prefers MMM's brand of "confidence."

I disagree completely; Collins has always been one of my favorites, and I thought the tone was fine. I guess I like pompous.

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Re: JL Collins - The Simple Path to Wealth

Post by BRUTE » Tue Jun 13, 2017 10:35 pm

for the record, brute also dislikes MMM's brand of confidence.

brute really likes dear leader jacob's brand of confidence, which seems to involve sitting quietly in a room, thinking, rather than broadcasting for the sake of being heard.

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Re: JL Collins - The Simple Path to Wealth

Post by Olaz » Tue Jun 13, 2017 11:49 pm

Zalo likes Father Joshua Sheats's brand of confidence, which seems to involve taking into account all perspectives for 1 hr+ content

And now, witness as Father Joshua speaks to Dear Leader Jacob for 3 hours: https://radicalpersonalfinance.com/inte ... e-rpf0025/

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Re: JL Collins - The Simple Path to Wealth

Post by BRUTE » Wed Jun 14, 2017 9:15 am

repost

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Re: JL Collins - The Simple Path to Wealth

Post by jacob » Wed Jun 14, 2017 9:36 am

How quickly this turned into tribalism :shock:

One should judge things by what they are and not who is saying them or how they're being said.

Maybe a blind-test is in order? We (JL, MMM, ERE) could each post whatever we think about a particular strategy in our own voice on each other's outlet pretending to be them then and see how readers respond. 8-)

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Re: JL Collins - The Simple Path to Wealth

Post by Olaz » Wed Jun 14, 2017 10:19 am

:P

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Re: JL Collins - The Simple Path to Wealth

Post by BRUTE » Wed Jun 14, 2017 9:16 pm

jacob wrote:
Wed Jun 14, 2017 9:36 am
How quickly this turned into tribalism :shock:
if jacob doesn't like tribalism, he can just <vague threat based on tribalism>

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Re: JL Collins - The Simple Path to Wealth

Post by Fish » Thu Jun 15, 2017 3:14 am

Here's a mention of ERE from the book. It's mainly using Jacob as an example to demonstrate that extremely low expenses are possible. I'm still at a stage where I'm excited to see any print mention of ERE.
JL Collins wrote:Can everybody achieve financial independence? On blogs like ERE and MMM, you'll find countless stories of people with modest incomes who by way of frugal living and dedicated savings get there in a remarkably short time. For example, if you can live on $7,000 per year like the author of ERE contentedly does, $175,000 gets it done figuring an annual withdrawal rate of 4%.
At the risk of fanning the flames of tribalism, here's a quote from MMM's foreword that makes me cringe a bit:
MMM wrote: I find that the writers of most books about stock investing cannot seem to get it right. They drag it out painfully or write paragraphs so dry and dense that you find yourself re-reading the same passage over and over for half an hour while your mind wanders off to more interesting pastures.

JL Collins takes this old style of investment book writing and disregards it completely. He creates the stuff that your mind wants to run to when it is tired of reading about stocks. Instead of esoteric equations about measuring a stock's alpha and comparing it to its beta, he compares the entire stock market to a large mug of beer and explains why it's still worth buying even when it comes along with an unpredictable quantity of foam.

He lights up the campfire and just starts telling stories, and if those stories just happen to be about exactly what you wanted to learn about in the first place, your new knowledge is a happy side effect.
The glowing praise is to be expected but this is essentially saying that JL's strength is being nontechnical and entertaining in his writing -- which is good if that's what you wanted, but don't expect to come out an expert. This is where "confidence" or "pompous" presentation becomes a legitimate concern because it creates a precipitous Mt. Stupid that is difficult to descend. It's the stuff of bestsellers but has side effects.

My main gripe is that Collins' success and reputation as the investing guru of the FIRE movement has reduced critical thinking on the subject. If you're a PF blogger, instead of posting an original thought and risking the wrath of the echo chamber, you can simply link to the Stock Series or write about investing in consistent terms. I think Trinity had a place in establishing the feasibility of FIRE in the early days before there was general acceptance that extreme ER was possible. Now this isn't a problem and it's time to open the investing piece to critical thinking and innovation. The Early Retirement Now (ERN) blog may be just the one to get that discussion going.

This said, if one is looking for a "simple path to wealth" (i.e. not pursuing or expecting mastery) then the advice in the book is actually quite reasonable and compatible with the FIRE canon. I actually like how FI is defined in this book, that is, "about 4%" SWR without trying to be too specific or inadvertently dangerous about it. He does recommend sub-4% to the security-minded and describes 3% SWR as a "sure bet."

Here are JL's thoughts on the 4% rule:
JL Collins wrote:It made for a great academic study [but] I think it is nuts to set up a 4% withdrawal rate and let it run regardless of what happens in the real world. If markets plunge and cut my portfolio in half, you can bet I'll be adjusting my spending. If I was working and got a 50% salary cut, I would, of course, do the same. [...] True financial security -- and enjoying the full potential of your wealth -- can only be found in this flexibility. As the winds change, so will my withdrawals. I suggest the same for you.
There's a lot to like but one must approach it with a blank slate, or at least be able to look past the presentation and the "100% stocks" message if you happen to disagree. I would place the content at Wheaton-3 (Exponential Growth).

Lastly, there is a section at the end of the book with praise, mostly from other FIRE bloggers. One of these caught my attention since it started in a very blunt INTJ fashion:
jacob wrote:Personally, I don't follow the strategy laid out in Collins' book. But then, I have spent years of work and study developing and managing my own. For those who don't want to do this, I'd recommend this book. If your goal is financial independence, you're going to need strategies that are optimal for your skills, talents, and temperament. Those in The Simple Path to Wealth will serve you well.

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Re: JL Collins - The Simple Path to Wealth

Post by jacob » Thu Jun 15, 2017 8:49 am

@Fish - My final endorsement was a negotiated compromise. My initial blurb was somewhat harder. However, putting things in perspective, people do pursue other (worse) strategies to FIRE such as leveraging up rentals by daisy-chaining the cash flows; or investing mostly in P2P loans figuring the cash flow will cover them; or trade NFLX on robinhood. There are people who don't even want to go as far as a standard boglehead portfolio. I think they're nuts, but what are you going to tell someone who has no interest in the investing part of FIRE at all(*)?

My concern with the book is the time-range of the experience and how this translates into the new FIRE enthusiasm.

It's hard to find a better 40 year period in US history than 1975-2015 in terms of valuation: http://www.multpl.com/shiller-pe/ (best slope ever!)

A big reason for this is starting the data run in the 1970s. Declining yields means rising equity (leverage, risk-seeking): http://www.multpl.com/10-year-treasury-rate (only way is up)

Stockmarket must follow GDP growth rate lest valuations climb into the sky, but growth rates are trending down: http://www.multpl.com/us-gdp-growth-rate (limits to growth?)

So JL has personally experienced the best market conditions the US has ever offered. In the FIRE movement this experience is now being related to young people where many of them only have an earnings experience related to 2007-2017, say: "The market went down, but it recovered and then went on a crazy growth spurt". So they find confirmation [bias] in the war stories from the 1970s to now because the story/experience is the same, just the timeframe is different.

Because of the data trends and the present starting point, I doubt 100% TSM is going to be popular forever.

However, I'm not super-worried about people. I think a lot of fretting comes about because the current trend is for people (Hi Tyler9000 ;-) ) to datamine/optimize the hell out of it to find the best fire-and-forget solution that's good forever (and that's fair enough), but what most people do---especially those with no skills, talents, or temperament for looking into these matters---is to belatedly switch paradigm along with the rest of the world and just follow the latest fashion after a few winners have become famous enough for everybody to know them, for example ... looking into books about the "best investment strategies" over time (the shelves at Goodwill are a treasure trove for this find of archaeological research) we find:

1965 - LTB and stock names ending with *onics.
1975 - Gold and collectibles
1985 - Cash instruments
1995 - Dotcom
2005 - RE
2015 - Index funds
2025 - Food? Local businesses? Land? Insurance? Annuities? PV panels?

I recall (with some feeling of vindication) that even the bogleheads got awfully quiet around 2009 .. and if the hardcore become less vocal about something, one can be sure that many of the more loosely attached supporters are falling away. In practice we saw/see this in falling prices. Some of these people never got back in ... or they're getting in now (ditto houses). Those who stayed in now feel vindicated and are even stronger in their faith.

(*) Actually, tell them 50% Wellington and 50% Wellesley (Got that from jp). Alternatively, the total world stock market using an adjustable SWR that corresponds to the dividends it pays out would fine too.

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Re: JL Collins - The Simple Path to Wealth

Post by Tyler9000 » Thu Jun 15, 2017 1:16 pm

jacob wrote:
Thu Jun 15, 2017 8:49 am
However, I'm not super-worried about people. I think a lot of fretting comes about because the current trend is for people (Hi Tyler9000 ;-) ) to datamine/optimize the hell out of it to find the best fire-and-forget solution that's good forever (and that's fair enough), but what most people do---especially those with no skills, talents, or temperament for looking into these matters---is to belatedly switch paradigm along with the rest of the world and just follow the latest fashion after a few winners have become famous enough for everybody to know them
Whassup? 8-)

It may not always seem like it on the surface but I completely agree with you. There's a reason I used red in the heat map to suggest blood rather than a hot streak. Even the choice of a 15-year investment period in the Portfolio Finder is very deliberate, as that's about as long as you can go without the 20-year stock bubble right in the middle of the data set deceptively skewing the averages simply because of the beneficial sequence of returns (one of my pet peeves with most outside stock analyses). To the extent that the site is an optimization tool, I have very intentionally designed it to focus on minimizing uncertainty and downside risk rather than maximizing returns. I'd much rather people plan for many different outcomes than simply bank on the single best one repeating. I believe it is possible to do that either with wise trading or with wide diversification, although I do think most people aren't as wise as they think.

Maybe we can start a crowdsourced actively managed Dunning-Kruger mutual fund. :D

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Re: JL Collins - The Simple Path to Wealth

Post by Fish » Fri Jun 16, 2017 3:23 am

@Tyler9000
It's really neat knowing all that thought went into the design of Portfolio Charts.

@jacob
I am that person with no interest in the investing part of FIRE, at least for now.(*) :( But I've adapted by downgrading my goal from full-fledged retirement to "FU money." I was going to ask your advice on where to begin, if starting from no skill, talent or temperament -- but I found the answer in another post:
jacob wrote:
Fri Jun 03, 2016 3:43 pm
My advice to my acolytes is the same as it's been all along and what is also written down in the ERE book: Understand what you're investing in! I think in particular ERE folks should have a level of education when it comes to investing that's on par with at least a freshman course in finance along with a few supplemental readings and some "continuous education" to go along. See the links to the Bodie or Riley books I gave above for starters. Indeed, I recommend that anyone who intends to live off of investing for 40-60 years need a somewhat more formal grounding than a handful of popular non-fiction level books on the most recent popular strategy coupled with blind faith that those books contain the ultimate solution. This formal grounding will help in choosing a strategy and rechoosing if it collapses.
My investing history is something like this:
2007: TIPS
2009: Cash(**) :lol:
2011: RE
2014: 3-Fund Portfolio
2016: Income

It's becoming apparent that I'm always switching strategies because I lack a proper foundation... which tends to result in the belated paradigm-switching you warned about. I'll fix this by taking your advice to read a more serious book.

(*)I wonder if anyone else thinks of saving as having a negative 1st order effect because it takes time and effort to manage the money you were unable to spend?
(**)Realized that high savings rates meant that investment returns were irrelevant toward achieving a goal of normal retirement. Would not learn FIRE was possible for another 5 years.

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Re: JL Collins - The Simple Path to Wealth

Post by P_K » Fri Jun 16, 2017 6:23 am

@Fish
Probably you found this already, but the books Jacob recommends for a startup background on finance/investing can be found here:

http://earlyretirementextreme.com/start ... sting.html

The order he suggests reading them in the comments is: 3, 2, 7, 4, 1, 6, 5

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Re: JL Collins - The Simple Path to Wealth

Post by ThisDinosaur » Fri Jun 16, 2017 10:53 am

@Fish,
Its been a full year since that quote, and I'm struck by how the active vs. passive investing debate comes up so much, with no change in the players. Collins and the pro indexer team like to quote studies that show fund managers are no more consistent than chimps with darts. Active investors quote studies that show the opposite, and use Jacob's perfectly sensible student analogy.

Parent: Kids who study most often get top scores. Slackers most often do poorly.
Kid: Nah. They don't do well because they study. Binomial probabilities predict that some kids will repeatedly get good scores just by chance. So their success is due to luck, not talent.
Seriously, is there any way to put this debate to rest?

On the one hand, it should be easy enough to start with the whole market and screen out the obviously bad investments. On the other hand, the majority of investment return comes from price changes. And price changes are determined by the aggregate mob's investment behavior. Even dividends depend on the population choosing to buy a particular company's product.

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Re: JL Collins - The Simple Path to Wealth

Post by Tyler9000 » Fri Jun 16, 2017 2:32 pm

Dad: You'll never make it to the NBA if you don't practice every day!
Kid: I definitely want to play in the NBA, so I should probably skip my homework.
Mom: Well I wanted to be a supermodel and we see where that got me. Do your damn algebra and you can watch the game afterward.
Effort alone will not make you 7 feet tall or give you Jacob's ability to model the internal workings of stars and apply similar math to trading strategies. Everybody is different, and IMHO knowing your own strengths and weaknesses is a sign of wisdom. There's nothing wrong with active trading if you truly have the gift (I don't). And there's also nothing wrong with taking a more hands-off investing approach and redirecting your energy to something with a higher personal return. The problem arises when you try to force yourself and/or others into something they're not really suited for. That goes not only for active trading when you don't know what you're doing but also for pushing people into highly volatile stock index funds while dismissing the possibility of any downsides.

jacob wrote:
Wed Jun 14, 2017 9:36 am
How quickly this turned into tribalism :shock:

One should judge things by what they are and not who is saying them or how they're being said.
That's a very reasonable and thoughtful approach. But as Scott Adams likes to point out, reason is only the third best way to persuade people.

Image

To the degree that guys like MMM and JLCollins can come across as pompous, I see it more as them deliberately working above the reason level in order to better persuade people. You'll see a lot of references praising the use of analogy in MMM's review of Collins' book. And MMM is a true master in crafting an identity that many people work hard to emulate. It's effective marketing, even if it may occasionally frustrate those who prefer to focus on what is being said rather than how it is being said.
Last edited by Tyler9000 on Sat Jun 17, 2017 10:05 am, edited 1 time in total.

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Re: JL Collins - The Simple Path to Wealth

Post by BRUTE » Fri Jun 16, 2017 10:16 pm

Tyler9000 wrote:
Fri Jun 16, 2017 2:32 pm
And MMM is a true master in crafting an identity that many people work hard to emulate. It's effective marketing, even if it may occasionally frustrate those who prefer to focus on what is being said rather than how it is being said.
or simply those who don't identify with his persona, the overconfident suburban lumbersexual yuppie

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Re: JL Collins - The Simple Path to Wealth

Post by Tyler9000 » Fri Jun 16, 2017 11:16 pm

BRUTE wrote:
Fri Jun 16, 2017 10:16 pm
overconfident suburban lumbersexual yuppie
Brute has a remarkable way with words. :lol:

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Re: JL Collins - The Simple Path to Wealth

Post by RealPerson » Fri Jun 16, 2017 11:55 pm

lumbersexual? That is a new one for me.

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Re: JL Collins - The Simple Path to Wealth

Post by GandK » Sat Jun 17, 2017 3:36 am

Tyler is right. Logical decision making is unicorn-rare. Almost nobody makes decisions by starting with research and facts. They "evaluate" (if you can call it that) the given situation in 5 seconds flat, decide what feels best to them based on their own preferences and value systems, call that decision either "gut feeling" or "intuition" depending largely on their education level, and then they go looking for facts and research to back up the position that they'd already decided upon.

I catch myself doing this all the time; it's my default. Because I recognize that this makes me vulnerable to advertising and other forms of manipulation, I try to arrive at the same conclusion applying logic before acting in important situations. But it feels like writing with my left hand instead of my right. I definitely don't act on reason most of the time. :oops:

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Re: JL Collins - The Simple Path to Wealth

Post by Fish » Sat Jun 17, 2017 11:47 am

@P_K Thanks for providing the link and suggested reading order!

@jacob So as far as I understand it, some reasons not to use to indexing as a FIRE investment strategy are:

1) Data trends suggest that the future will not look anything like 1975-2015.
2) Systemic risk due to the success of the investing strategy being coupled to the success of the economy. If the economy tanks, so do your investments and you'll be competing for a job with a bunch of other people who have lost theirs (but their work experience will be more recent!).
3) Systemic risk due to lack of strategy-diversification when it comes to investing. If indexing fails then a lot of people lose a lot of money. Workers will extend their careers because they don't have enough capital to retire. Other retirees will want to go back to work because they no longer have enough capital to support their desired standard of living. This will put additional pressure on the job market.

Combining factors 2 and 3, FIRE with heavy reliance on TSM is exposed to a huge downside risk that a systemic failure of the economy entails. Suppose I FIRE, expecting that if investments don't pan out, I'll just go back to work. But if everyone else has that same contingency plan, then they're all looking for work when I need work. If the jobs aren't there (which is likely when this happens), it's a disaster.

Some solutions I can think of are to hedge the downside by investing in something that's less correlated (akin to PP), or to invest in index funds, but continue focusing on earned income to increase the savings buffer and also keep a foot in the door of the job market in case the economy goes down.

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Re: JL Collins - The Simple Path to Wealth

Post by Olaz » Sat Jun 17, 2017 12:09 pm

@Fish, while all of that is true, I think a good asset allocation including more than TSM would solve a lot of the problems you mentioned. Someone that is indexing could have radical life strategies in case if things do go bad, such as living in a cheaper country, an RV, backpacking for a while, etc. They could also save a large buffer so that things would have to get *really* bad economically for their lifestyle to feel it.

Is the alternative to learn a particular active investment really well, and having a pulse on it consistently? But what if you're sailing for months, or backpacking a thru-trail, or simply forget? The demand of constantly having to be with your investments is also a risk.

There's also the upside with indexing a well-diversified portfolio. What if the economy actually does decent to good? Then the indexers well diversified portfolio is awesome. If they don't spend most of those returns anyway because of the large buffer, they're in even better shape.

Finally, while the well-diversified indexer is financially independent, they could learn useful skills such as welding, woodworking, house building, accounting, etc. These skills are likely really valuable wherever one goes, even during recessions.

Thoughts?

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Re: JL Collins - The Simple Path to Wealth

Post by Fish » Sat Jun 17, 2017 1:15 pm

@Olaz Of course! How could I forget... the first 90% of the ERE book has all of the lifestyle strategies needed to hedge bad macroeconomic outcomes. As Jacob implied on the "About ERE" page, economic independence (ERE) is superior to financial independence (FIRE) because the latter relies on the economy to work. Ultimately, since investing strategies can't fully decouple FIRE from the economy, to be successful in all economic climates requires a change in basic lifestyle strategy.

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Re: JL Collins - The Simple Path to Wealth

Post by MZMpac » Tue Jun 20, 2017 4:53 pm

TSPW was actually the first FIRE book I read. So for me it was a home run. I knew little about investing, and I liked his casual style plus the way he demystifies investment terminology. He presents it as such a fail-proof method that I was almost skeptical. So of course I read other FIRE books, which come to a similar conclusion. All FIRE material is based on the same premise---avoid debt, save 50%+ of your gross, live modestly, and stay the course.

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Re: JL Collins - The Simple Path to Wealth

Post by Dragline » Tue Jun 20, 2017 10:50 pm

Well, there's more than one way to skin this cat. And a lot more ways to end up with cat fur in your mouth. This one is as good as any if you can stomach the downturns.

@Fish -- yes, switching horses midstream is a way to choke on cat fur. Pick something you can stomach and hold on to your stomach.

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