Ep 20. The Simple Path to Wealth with JL Collins

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Jim Collins has literally done it all. From busboy, produce, clerk, and gas station attendant, to ad agency founder, sales trainer, radio co-host, and publisher. He is a prolific world traveler, having visited more than 30 countries on five continents via motorcycle, car, train, plane, boat—and even elephant.

Jim has lived a very good life. And along the way, Jim has learned that money is a tool that can offer the freedom to live the life you want to live.

He’s also figured out that there is a very simple path to wealth. While you can make money picking individual stocks, the index fund is a very easy way to grow your wealth in the stock market without spending time researching companies.

This episode truly is the show for anyone who has money or wants to have more.

Listen here or on your favorite podcast app.

Never get tired of Mr. Collins interviews! Heard him first on MadFientist. The rhetorical questions Scott had for Jim (although containing several parts) was such great insight into investment philosophy development. GREAT back and forth! While the theme of index funds was definitely driven home, I think the point that really sunk in for me was INCREASING YOUR SAVINGS RATE! Maybe this is due to the fact that I'm FINALLY 57pgs into The Richest Man in Babylon (great timing with the book recommendation!) OR maybe this point has always been made but for some reason it really resonated with me on this listen. Index funds yes, but index funds coupled with an increased savings rate even better!

The point being made by Jim (echoed by Scott) and also state by Buffet about how they were all wise enough to point out the message of indefinite holding of index funds despite their other successes, made me feel like I should be wearing a toga listening to Arkad! :)

As an overarching aside, THANK YOU again, Mindy and Scott, for branching out into this money specific part of the BP brand. I think back to even a year ago when my wife and I were ready to take the leap into investing in Real Estate BUT we came across Mr. Ramsey and completely got our financial house in order in 9 short but grueling months first. Not only are we we in such a better position to make REI PART of our portfolio plans, but listening to this podcast, Mad Fientist, and Chose FI podcast is truly allowing us to take actionable steps (on Mr. Ramsey's step 6 and 7) towards FIRE with a 'better plan' than we first developed.

P.S. Scott and Jim's books are next on our reading lists! Here's to IPO goals :)

Great episode! Stoked that you guys were able to get Jim on. 

One thing Scott touched on that I think is worth discussing further: opportunity cost of trying to self-manage. 

I used to watch Jim Cramer's "Mad Money" show and remember him talking about the time it takes to properly manage a portfolio yourself (if you actually believe you can beat the market). If I remember correctly, he recommended several hours each week, which could easily be 10-20/month and hundreds over the course of the year.  

For the sake of example, let's assume that you could theoretically beat the market (which is a big assumption in itself for most people). If you don't know a lot about stocks and investing, I would argue you would need to spend dozens (possibly getting into the hundreds) of hours just to have the foundation of knowledge required to successfully self-manage. Then on top of that, you would need to spend 10-20 hours/month keeping up with major world news, market trends, and the news of the individual companies in your portfolio. After all this effort, you might be able to outperform the market by a few % points per year. 

I propose that for many investors, rather than investing significant time to manage their portfolio, they would be better off trying to increase their base income and then investing this difference in low cost index funds. Instead of spending 10-20 hours/month trying to beat the market, what would happen if you invested that time in a side hustle, put in a little more time into your day job (to earn a higher bonus, get promoted faster, etc.), or learned a new skill that could lead to a higher-paying job or side hustle in the future (web design, coding, data analytics, etc.)?

To test this, I looked at 2 (oversimplified) scenarios: Self Managed vs. Side Hustle. Key assumptions:

  • Self-Managed
    • 10% annual return (0.8% monthly return)
    • $1K/month in additional portfolio contributions
    • Assuming trading frequency is low enough such that transaction fees are negligible (but if someone was adjusting his/her portfolio every week, this could add up).
  • Side Hustle
    • 6% annual return (0.45% monthly return) in a low cost index fund like VTSAX - this is probably a little conservative and most likely would be higher return in the long run. 
    • Increase portfolio size by $1,100 per month ($1K in additional contributions plus $100 in post-tax income from side hustle)
    • Same assumptions about trading frequency as Self Managed scenario. 
    • Low cost of management fees considered negligible.

Based on these assumptions, here are the Year 1 results. Side Hustle portfolio is $1000 greater by the end of the year:

Continuing for Year 2, Side Hustle portfolio is $1,500 greater:

Given a large enough portfolio size, eventually the Self Managed portfolio would outpace the Side Hustle portfolio. Based on these 2 (again, oversimplified) scenarios above, the Self Managed starts to be the better choice after 4.5-5 years.

Ultimately, I think low cost index funds + a side hustle would be the best route for most investors, especially the average investor who is just starting out.

A few other considerations worth taking in my opinion:

  • If someone believes they can outperform the market, what evidence is this really based on? It's kind of like managing a budget: if you don't have the hard data and evidence, you don't know how well you're actually doing. As Jim mentioned, it's really easy to think you'e beating the market, but maybe you're just remembering the few big wins you had and are forgetting the small or large losses that could negate these wins. 
  • The example I gave only assumes $100 difference per month. For someone with a more lucrative side hustle, a real estate investory, etc., the upside of the opportunity cost could be much greater. If you're able to acquire 1 more investment property or flip 1 more house per year because you're not spending hundreds of hours each year trying to manage your portfolio, I'd argue this is much better use of your time. 
  • The above scenarios also do not factor in the significant time required for most people to even learn how to self manage or the cost of potential mistakes when starting out. If it takes 100 hours just to learn how to self manage, you could focus on your side hustle and start at "Time 0" with thousands of extra dollars in the Side Hustle portfolio. And/or if you make a few bad investments because you're still learning to self manage, your return the first few years may be much lower, which only increases the time it will take for the Self Managed portfolio to outperform the Side Hustle. 

Anyway, I think I've successfully beaten this dead horse into the ground. Interested to see what everyone else thinks. 

Great Episode! 

To play a little devil's advocate, I'd like to say that I am not entirely sold that pursuers of early financial freedom should start off with index fund investing. Scott mentioned in the episode that the ways to generate wealth are: 

1. Spend Less

2. Earn More

3. Achieve High Returns

4. Start a Business 

By index fund investing, you are only doing #1 and #2 here. With only index fund investing, I believe achieving financial independence in your 20s or early 30s will be much more unlikely than other investment types. 

While 7% completely passively is definitely nice, I feel as though some younger pursuers of financial independence should be seeking a higher return at first. For example, I believe that house hacking is the best return someone can get without taking abnormal amounts of risk. 

To me, it makes the most sense to continue to pursue these high return strategies initially. Once you've built a nest egg and your net worth gets to be $500k+ is when I feel it makes sense to put it into Vanguard and enjoy the complete passivity of it. 

@Scott Trench @Mindy Jensen  - curious to hear what you guys think about this? 

@Craig Curelop I agree with you.  I am a fan of index fund investing but I also think that if you rely solely on that...you will not achieve financial independence in your 20s and 30s.  Some in the FIRE community have gotten there in their 30s with purely index investing (Go Curry Cracker, Millennial Revolution, and Root of Good to name a few).  However, you would need a high income combined with living or "retiring" to a low cost of living area.

I used to be focused on index investing and I still have much of my portfolio in that but for me living in NYC trying to achieve financial freedom...I need some help...I need to use some leverage which real estate provides.

@Mindy Jensen

Let me tell you how much I liked this episode of the podcast and how much I liked JL Collins. I sold everything in my Roth IRA and decided to buy a total market index fund instead with all the money. It just made sense and I feel like a fool for not doing it before.

Good episode. I would like more info or discussion on the what and how, once your incredible investment increases over the course of 20+ years, now to become liquid?

JL had mentioned “never taking the money out” in reference to heirs and monetary rollover, if the money never becomes liquid how is it good to anyone or anything? How do you avoid taxes, where to put the$$$ post market exit, etc. ?

I also understand most index funds offer a small divy but not necessary enough to live off, example [email protected]% is only 40k.

I agree. I think index funds are great. But I have since discovered cash value whole life insurance using infinite banking.

I think one should start with that process and then move money from that into the investments of their choice: index funds, real estate, etc. Or for me, I just love the cash value life insurance and real estate.

Originally posted by @Mark Welp :

I agree. I think index funds are great. But I have since discovered cash value whole life insurance using infinite banking.

I think one should start with that process and then move money from that into the investments of their choice: index funds, real estate, etc. Or for me, I just love the cash value life insurance and real estate.

 I have to agree with you. I think Bigger Pockets gives way too much credence to young investors with no life experience. We've been in a bull market now for well over 10 years. I don't think this young investor has even lived through a single market correction let alone a lifetime's worth. I started investing in index mutual funds early in my life and I made good money so I put a lot into my savings. I've also lived through the crashes of 87, 00-02, and 07-08. Portfolios don't just go up as they have for the last 10 years. 

After the growth of the last 10 years, I'm sure many people are looking at their portfolio values and thinking they may be close to having enough to retire. They need to remember markets don't always go up. The corrections in 00 and 08 were -35% and -40% respectively. And that was just the index. Could you retire tomorrow if your portfolio lost nearly half its value? When I was about 20 years out from retirement age that realization suddenly hit me--in conjunction with the crash of 07. That is when I started looking for safer options than the stock market.

An indexed universal life policy has much the same cost characteristics of a stock index fund without all the risk. And I don't think most people realize you can take 2-3 times the income from a life insurance policy (tax-free) than you can get from funds held in a qualified account or brokerage account. The old 4% rule (now more like a 3.5% rule) is more like 7 or 8% when you are borrowing against the cash value of a policy, not physically withdrawing it like you would do with a brokerage account. When you retire, income is what matters. The value at the bottom of your account statement is meaningless.

Whole life is fine, but you'll never see the same kind of accumulation that you can get with an IUL. And the policies need to be designed for minimum death benefit, maximum cash value (whether whole life or IUL). Infinite banking policies are not designed that way. You won't get as much cash value from your premium as you would with a properly over-funded policy design.

And the best thing is that, unlike a 401(k) or IRA, you can leverage the cash value to invest and build wealth outside the policy. If your cash value is growing at 6% and you can get a line of credit against it at prime (4.5%ish today), then anything you do with that 4.5% money adds value on top of the cash value growth.

Yeah, thanks for the sales pitches. Sheesh.

Great episode. Never looked at an index from the losers fall off standpoint. At risk is only your investment in that stock sliver of the index, yet the upside could be many multiples.

Great guest!

Originally posted by @Thomas Rutkowski :
Originally posted by @Mark Welp:

I agree. I think index funds are great. But I have since discovered cash value whole life insurance using infinite banking.

I think one should start with that process and then move money from that into the investments of their choice: index funds, real estate, etc. Or for me, I just love the cash value life insurance and real estate.

 I have to agree with you. I think Bigger Pockets gives way too much credence to young investors with no life experience. We've been in a bull market now for well over 10 years. I don't think this young investor has even lived through a single market correction let alone a lifetime's worth. I started investing in index mutual funds early in my life and I made good money so I put a lot into my savings. I've also lived through the crashes of 87, 00-02, and 07-08. Portfolios don't just go up as they have for the last 10 years. 

After the growth of the last 10 years, I'm sure many people are looking at their portfolio values and thinking they may be close to having enough to retire. They need to remember markets don't always go up. The corrections in 00 and 08 were -35% and -40% respectively. And that was just the index. Could you retire tomorrow if your portfolio lost nearly half its value? When I was about 20 years out from retirement age that realization suddenly hit me--in conjunction with the crash of 07. That is when I started looking for safer options than the stock market.

An indexed universal life policy has much the same cost characteristics of a stock index fund without all the risk. And I don't think most people realize you can take 2-3 times the income from a life insurance policy (tax-free) than you can get from funds held in a qualified account or brokerage account. The old 4% rule (now more like a 3.5% rule) is more like 7 or 8% when you are borrowing against the cash value of a policy, not physically withdrawing it like you would do with a brokerage account. When you retire, income is what matters. The value at the bottom of your account statement is meaningless.

Whole life is fine, but you'll never see the same kind of accumulation that you can get with an IUL. And the policies need to be designed for minimum death benefit, maximum cash value (whether whole life or IUL). Infinite banking policies are not designed that way. You won't get as much cash value from your premium as you would with a properly over-funded policy design.

And the best thing is that, unlike a 401(k) or IRA, you can leverage the cash value to invest and build wealth outside the policy. If your cash value is growing at 6% and you can get a line of credit against it at prime (4.5%ish today), then anything you do with that 4.5% money adds value on top of the cash value growth.

Setting up cash value whole life insurance policies using an infinite banking strategy is far too complicated for 99% of people. Keep in mind that the average person has a hard enough time setting up their employer based 401K.

I think the purpose of the episode was to establish a nice simple investment strategy that anyone can easily follow and make excellent returns.  

Tony,
I see what you are saying but I think that is the problem with some financial education.

Index funds are great, they really are, however people do just throw money into mutual funds or their 401ks and really have no idea what they are investing in. I am not an agent selling this stuff, I am a CPA. However, I wish someone explained cash value life insurance to me in my early 20s than people pushing me into government products such as 401ks, ira and 529s.

Those products have really have no flexibility.

Thanks!

Interesting points but I'd have to agree with @Anthony Gayden , for many people it just seems obvious they should stick to an S&P index given how incredibly simple yet powerful it is over the long run (as JL states). Keep in mind if you held an S&P index from 1980-2010, that means you went through Black Monday, the S&L crisis, the Dotcom crash and the Great Recession, and at the end your portfolio's CAGR was still a solid 11.4%, or said differently your portfolio grew by more than 25x (with dividends reinvested). You can also look at any 20 year time frame and still get an attractive return (the worst I could think of is 1990-2010, and even then you earned an 8.5% CAGR or 5x your money). And it's obviously a simple way to take advantage of lower tax rates since you benefit from qualified dividends and eventually long term capital gains.

My understanding is the main benefit of the IUL approach is in addition to the fixed yield, you get to borrow against the cash value to invest elsewhere. That could be a great strategy for some people, especially if you are a savvy investor, or have different circumstances. But I think the main audience for JL's blog are folks with little financial background, who want a very simple yet very solid approach for the long run. Not sure advising them to get a policy where they can borrower against the cash value would lead to responsible decision making. And some people just want to avoid debt altogether.

I agree there are a lot of people excited about indices because of the recent bull market. And you could argue that many of them shouldn't invest in an index because they don't have to discipline to hold their investments during a crash. But then I'm not sure they would be qualified to use something like insurance policies you can borrow against either.

Originally posted by @Abel T. :

Interesting points but I'd have to agree with , for many people it just seems obvious they should stick to an S&P index given how incredibly simple yet powerful it is over the long run (as JL states). Keep in mind if you held an S&P index from 1980-2010, that means you went through Black Monday, the S&L crisis, the Dotcom crash and the Great Recession, and at the end your portfolio's CAGR was still a solid 11.4%, or said differently your portfolio grew by more than 25x (with dividends reinvested). You can also look at any 20 year time frame and still get an attractive return (the worst I could think of is 1990-2010, and even then you earned an 8.5% CAGR or 5x your money). And it's obviously a simple way to take advantage of lower tax rates since you benefit from qualified dividends and eventually long term capital gains.

My understanding is the main benefit of the IUL approach is in addition to the fixed yield, you get to borrow against the cash value to invest elsewhere. That could be a great strategy for some people, especially if you are a savvy investor, or have different circumstances. But I think the main audience for JL's blog are folks with little financial background, who want a very simple yet very solid approach for the long run. Not sure advising them to get a policy where they can borrower against the cash value would lead to responsible decision making. And some people just want to avoid debt altogether.

I agree there are a lot of people excited about indices because of the recent bull market. And you could argue that many of them shouldn't invest in an index because they don't have to discipline to hold their investments during a crash. But then I'm not sure they would be qualified to use something like insurance policies you can borrow against either.

@Abel Teklu  The opportunity for leverage was only briefly mentioned in my post... as an added benefit. You make it sound so complicated. its not. It is literally no different than leveraging real estate and using the proceeds to reinvest in real estate. This is something that nearly everybody on this site understands or came here to learn about.

The main point of the other 7/8ths of the response was that cash value life insurance, and especially an over-funded IUL, will likely keep up with the index fund, has principal protection, and will provide 2 to 3 times the income of money sitting in a brokerage account invested in an Index fund. Twice the income from the same amount of money is a huge point that I think most people miss. 

An uneducated investor blindly putting money into stock mutual funds is exactly what Wall Street wants. This is the dumb money that will keep Wall Street in their fancy homes and driving fancy cars. Over-funded Whole Life and IULs are a much safer choice. They'll earn a great return on their cash value and the money will be there when they need it.

You point out the index returns over long periods of time. You must be young. Your point of view will likely change when you find yourself within 10 - 15 years of retirement. What are you going to do when the market loses 40% of its value like it did in 07-08? Are you still going to enjoy the same retirement lifestyle? What if it happens right before you want to retire? or right after? That Averages doesn't help you when you need the money and your portfolio is down.

Compare money going into an over-funded IUL against the same amount going into a S&P 500 index fund for 20 - 30 years. You'll find that both end up in just about the same place. If you graphed it, you'd see that the trip from beginning to end on the index fund was a wild roller coaster ride. The IUL value just grows steadily in a stepwise fashion. Then take that ending value and convert it into INCOME. The common rule of thumb for money in the market is about 3.5%. The old 4% rule has been debunked. Life insurance income rates are more like 7% to 8% and it comes tax-free.

https://www.cnbc.com/2015/04/21/the-4-percent-rule...

Question for all the savvy investors with a little tax knowledge as well.

I have been looking to make the switch from my current investment portfolio into index funds (@Mindy Jensen and @Scott Trench - in huge part to your podcast - loving it!). Finished The Simple Path to Wealth two days before this podcast was launched; perfect timing.

I was fortunate enough to start investing at a young age because of my parents, but I was more or less grandfathered in with a financial advisor for the last 8-10 years. Awesome guy and we have a great relationship, but I can’t jusitify staying with him and paying both a management fee as well as a fee per trade.

I currently have my Roth's IRA and my wife's Roth IRA with him as well as a much larger taxable account.

I want to make the move to vanguard with each of these accounts and was hoping for guidance on the best way to do so?

From my understanding, it should not be problematic to move the IRAs over as they are not subject to capital gains, correct?

However, for the taxable account, what would be my options to limit my tax basis (as well, how would I be able to calculate what my capital gains would be - is there a simple way to do so?)?

Any information or guidance is much appreciated!

@Thomas Rutkowski

Para 1 - again, my view is the main audience of this is for folks who want a very simple strategy that can be very effective over the long run. If you want alternative strategies using debt, then by all means consider IUL and real estate. But when I think of my family & friends, this is targeted to the 99% of them have no interest in real estate, private equity, etc. As such, they are better off sticking to a model over the long run that does not entail using leverage yet still provides satisfactory results (e.g., index). 

Para 2 - You're right, I do not understand how I can deposit the same amount of money into an IUL and an index, they both keep up with one another from a performance perspective, yet at the end the IUL has 2-3x the money. Unless you mean the IUL has a higher balance because I have been regularly contributing cash to it because the bulk of my premium payments have been going to cash value, in which case I would think you need to do the math assuming I regularly contribute the same amount to an index. If they both perform in lock-step (excluding fees), and have the same contribution amounts, I could be missing something but I don't see how one ends up with 2-3x the value of the other. 

Para 3 - I've worked on Wall Street. Trust me, none of us were high fiving each other because money was sitting in a product that charged 0.04% (as it does in VFIAX) and wasn't actively traded. The fancy homes and fancy cars mostly come from trading commissions, actively managed accounts with high performance fees, sponsor fees, high loan fees, complex insurance products, prop trading, or exotic ETFs which charge higher fees because they are in illiquid items like emerging markets. 

Para 4 - You're right, I am young and I am looking at this from a long term perspective. And despite my age I also realize that it's inappropriate to make financial decisions by focusing on 1 year without taking a step back to look at the bigger picture. Take my 1980-2010 example, but assume instead that I retire in 2008 because I have terrible luck. Well from 1980-2008 my portfolio is up 19x, so $100k is now $1.9MM vs the $3.1MM it would have been had I retired in 2007. Your example seems to imply that when I reach retirement in 2008 I liquidate everything that year and take the entire hit of the 40% drop. Perhaps. Or perhaps I am happy just liquidating 7% of that $1.9MM, and living off of $130k every year, which means the remaining $1.8MM of my assets are still invested in the index, which means just like the 1990s after Black Monday, the early 2000s after Dotcom, and 2010-17 after the Great Recession, it's incredibly likely that the market will more than make up the loss before I have come close to depleting my retirement. Yes 07-08 would have sucked, but it could also not be a big deal because I am withdrawing a healthy income and get to watch my remaining investments grow from 2008-2017. Interestingly enough the market more than doubled from 2008-17, so the $1.8MM retirement account would have gone back up or beyond the $3.1MM peak I had in 2007. My guess is you would arrive at a similar conclusion after every other crash.

Para 5 - this may again be my young age clouding my vision, but if someone is taking the "set it and forget it" approach of indexing, then whether the growth is volatile or smooth in the interim is a bit irrelevant. The only thing that matters is what are the results over the long run. A smooth 10% and volatile 10% is still 10%.

Again, not saying infinity banking concept is a scam or shouldn't be considered. I'm just saying if my immigrant family member comes to me with little knowledge and little interest in investing, I would tell them to stick to indexing over the long run and keep out of debt.

Thanks!

Para 4 - better yet, maybe I've embraced FI and am happy living off the 3% dividends ($60k on the $1.9MM) and not even touching the principal amount. It really depends on your situation, but there are many more options than liquidating the same year of a financial crash.

This was great. Now I’ve bought the book. Equally great. I highly recommend this to anyone interested in building wealth. Simple simple simple. No drama, no hype, just common sense

I currently use fidelity and got about 50k amongest funds and a stock or 2. I’ got a good amount in snp500 index but can anybody that uses fidelity give me a little model index fund portfolio

The Simple Path to Wealth was actually the first book I read that was purely about finance. My older sister actually gave copies to me and my other sibling as Christmas presents a few years back! You can bet that we laughed it off and ripped some jokes on her. But later that year I had some free time, saw the book on my shelf, opened it out of sheer boredom, and ended up devouring the whole thing basically that same day. 

Collins does a phenomenal job of fleshing out the concept of financial independence. What I love about the book is that it is eminently readable regardless of your level of knowledge in the area of investing. I think that, while this book works for a wide range of readers, it is especially useful for those people in the initial stages of investing. I can't find the post now that I look, but yesterday I read a great BP post about the "stages" of real estate investing—and how important it is to understand where you are in terms of preparedness.

However, I agree with Craig Curelop—I think that for young people like myself, some of the creative strategies found on BP (such as house hacking) offer a really great way to rapidly move towards minimizing expenses and maximizing income, savings, and net worth. Passive investing is great, and honestly preferable for a lot of young people who just don't have the time, energy, experience, or connections. I just think that the IRR and cash on cash return for something like house hacking a fourplex in my area really elevates the trajectory of my net worth beyond what passive investing would make possible.

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