Welcome to BiggerPockets Money Show, Show Number 20.
“The beauty of investing is that if you keep it simple, it doesn’t have to take up much or really any of your time, very little of your time, and unlike many things in life, the less effort you put into it, once you understand and implement a few basic concepts, the better your results will be”.
It’s time for a new American dream, one that doesn’t involve working in a cubicle for 40 years, barely scraping by. Whether you’re looking to get your financial house in order, invest the money you already have, or discover new paths for wealth’s creation, you’re in the right place. This show is for anyone who has money or wants more, this is the BiggerPockets Money podcast.
Scott: How’s it going, everybody? I’m Scott Trench and I’m here with my co-host, Miss Mindy Jensen. How are you doing today, Mindy?
Mindy: Scott, I am doing super fantastic. It’s a beautiful day out and I am so excited for today’s guest. We have Jim Collins today from JLCollinsNH. He has literally done it all, from busboy, produce clerk, and gas station attendant in his younger days to ad agency founder, sales trainer, radio co-host and publisher.
He’s a prolific world traveler. He’s 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, he learned that money is the tool that you can use to give you the freedom to live the life that you want to live. And he’s also figured out the simple path to wealth.
Scott: Yeah, I was going to say, that sounds like a very complex approach to money in order to sustain that incredible lifestyle. But no. Jim has got a very simple path to wealth. The reason we’re saying the simple path to wealth is because Jim is also the author of a bestselling book called A Simple Path to Wealth, which I think Mindy and I both love and would recommend. If you—I would even recommend after you listen to this podcast, if you like his voice, you get the Audible version because it’s him reading it the whole time and he’s got this incredible radio ready voice.
Mindy: Yeah, James Earl Jones-esque. So I want to give a little bit of Jim’s background. Or I wanted to give a little bit of Jim’s background to say he’s done a lot. He has the wisdom to speak from experience and say I’ve done a lot of different things. This is the way to go. And today, we’re going to talk about index funds and how this powerful and super easy, set it and forget it investment strategy is what he recommends. Warren Buffet has recommended it so two of the top investors in the world is recommending this path. You should take it.
Scott: Yes, and quick disclaimer—we talk about some specific funds on this show. We usually do not talk about specific investments on the BiggerPockets Money Show. We don’t talk about buy this stock or buy this property. We talk more in kind of generalities of buy index funds, low-cost, that kind of stuff. This show does include some references to specific funds. You’ve got to invest according to your own strategy and with your own thoughts.
We cannot endorse those funds or recommend them as actions that you take. So you understand that that is at your own risk if you take any of these specific funds going on in this show. And as with anything, make your own decisions. Accumulate the information and make the decision that works best for you for your long-term strategy.
Mindy: Okay. So we bring in Jim after that kind of dire warning. But—
Scott: Yes. Well, hey, it’s a CYA thing but before we bring in Jim, I want to do two quick things. First, I want to kind of give a shout-out here. We have talked a lot about, to a lot of people that don’t have families, that don’t have children. We’re looking—we know that that’s a big hole in our plan. We know that there’s some disadvantages come financially once you begin having children involved in the picture and that kind of limits your ability, flexible with moving locations, maybe jobs. It kind of increases expenses, those kinds of things.
We would love to hear from more potential guests that are moving towards FIRE and have achieved FIRE that started that journey, really started getting serious about it while having a family with children involved. We think that would make for a great guest so if you know anybody like that, or if you are like that, please reach out to us. [email protected] and/or [email protected]. And we would love to hear from you.
Mindy: Yes. Please send us notes. Also, if you have a delightfully terrible joke, [email protected].
Scott: Fair enough. And before we bring in Jim, a quick word from today’s sponsor.
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All right, thanks very much to today’s sponsor. We are looking forward to bringing Jim on so let’s bring him in.
Jim, it’s great to have you here. Welcome to the BiggerPockets Money Show. How’s it going?
Jim: Scott, it’s an honor to be here and I’ve been looking forward to this for the last few weeks. Thank you for having me. Going well.
Scott: Yeah, me too, as well. I thought we could get started here by kind of quickly asking you about your background as you kind of moved towards FIRE. Could you give us an introduction or highlight of how you came to discover the concept of FI and how you began moving towards FIRE?
Jim: For someone like me, that’s actually a really interesting question. So I started, the better or the best way to look at that, I suppose, is I started investing in 1975. And I always knew I wanted to have enough money to put me in a position of power to make decisions in my life. And at some point, I read that James Clavell novel, Noble House, and I came across the concept of what he called FU Money. He actually spells it out a little more explicitly than that and I’ll leave it to the audience to figure out what the FU stands for.
But anyways, I had never heard that term before but it immediately crystallized what I wanted. So my goal was not FI, which is a concept I didn’t hear until after I started blogging back in 2011. So for decades, I wasn’t striving for FI. I didn’t understand it as a concept. Had I heard of it, it would have been a goal but I just hadn’t heard of it. But having a few money, which is simply enough money that you can be bolder in your choices, is not necessarily in my mind enough money that you never have to work again.
But it is enough money that you can step away for a period of time, which is what I did for my career. And then when I sort of left my last formal job in 2011, I started the blog as an archive of information I wanted my daughter to learn. And the other thing I throw into that is a common question that I get is when were you FI? And again, understanding I didn’t have the concept of FI.
I had left a job in 1989 to do something else for a while, which sort of part and parcel of the way I conducted my career over those years. And about three or four years in, at the end of the year, I was totaling up our net worth and investments and what have you and I noticed something very interesting and that was that for that year, and the two years prior, we’d lived the same life that we had always lived.
We had the same house, did the same things, paid the same bills. I didn’t have a job. I didn’t have income. And yet, each of those years, our income or our net worth was higher than it had been the year before. And I knew something remarkable had happened. It’s what we would now called FI but I didn’t have a frame of reference for that.
So I knew it was remarkable. I kind of embarrassingly—I don’t think I really appreciated—the significance of what it was. So I just sort of said, oh, that’s interesting, and rolled on living my life the way I had always lived my life.
Scott: That’s amazing. A couple of phrases that I want to point out that you just kind of decided here is position of power in your life, being bolder in your choices—that, I think, is really what all of this is about. It’s the fact that you can leave and do something different for a couple of years and have those options coming into your life. And say FU to those situations that are not in your best interests that are not making you happy here.
I guess moving maybe a little earlier in the journey, what was your career? What were you doing where you were able to save up and how were you investing your money so you could get towards this goal that you didn’t even know existed, I guess.
Jim: Again, pretty early on, I had a focus called having FU money. But my career was mostly in the magazine publishing business and business-to-business magazines. I did just before that time, I mentioned in 1989 when the year just prior to that, I had stepped away from publishing and went into the financial business for a year and then sort of kind of a midcareer change that I weren’t pursuing or acquiring businesses and then went back into the publishing business. So that’s kind of long and boring. And I think I kind of sort of lost track of what you were asking me.
Mindy: Well, I’m going to tag onto what you were saying. You said you were in the financial business. What do you mean by that?
Jim: So I ran into a guy on an airplane during a business trip and he was working for an investment research firm and I was very interested in investing in stocks and I was very active in doing it at the time, so once I understood what he was doing, that was the topic of the conversation. And then by the time the plane landed, he said, you know you ought to come and join us. You’ve got to join our firm.
So a few days later, I had lunch with the guy who owned the firm and I wound up making a career change. So I was what you call an investment officer, what they called an investment officer, which was kind of a sales guy. I went out and sold out research to institutional investors.
Scott: Awesome. So I guess my question that I was trying to get at was once—how are you able to achieve the high savings rate that allows you to accumulate this FU money. And then how are in investing it on your own? In these years leading up to 1989 when you kind of reaching FI but you didn’t know it.
Jim: Right. So you know, you have to understand when I was doing this, there was no internet, there was no infrastructure, and there was nobody else doing what I was doing. So I was kind of wandering along but what I knew was that I wanted to have money available to invest because I wanted to accumulate this FU money. So I just started saving half of my income and my income is those days, because it was early on in my career, was very low. But man, I’ve living on less as a college student so it wasn’t any great sacrifice.
I was still having a great and enjoyable life and I had 50% of my income to invest. And I didn’t think of this as deprivation, by the way. It’s just it was a different way of spending it, if you will. Some people—my peers mostly wanted to spend on unfancier apartments or calls or whatever, and my priority was a little different. I wanted to spend it on investments. So that was what led to the high savings rate.
So that was the very first money I took off the top was for my investments. It was most important money I spent. As to the second of it, I initially was buying individual stocks and then a little later, I was buying actively, I managed mutual funds so I was researching managers, so I was trying to outperform the market, picking stocks myself. And then in addition to that, I was trying to find active managers who could do it.
Here’s my dirty little secret and of course, I’m a die-hard index investor now and that’s what my book’s about and my blog is about. I actually achieved FI picking individual stocks and as an extension, picking managers that ran funds picking individual stocks.
So sometimes people get confused and they think well, picking individual stocks or active fund managers is completely ineffective. It’s not. It is not as effective or powerful as investing but it got me there initially. Index investing is the advantage of being cheaper, more powerful, and easier, simpler.
Mindy: Okay. And we have talked about index fund investing very briefly in past episodes but can you just share with our listeners what index funds means? What are you talking about when you say index fund investing?
Jim: Well in a sense, that’s two different questions. So an index fund, the idea is simply you find an index that is tracking some group of companies and you buy every company or the fund buys every company in that index. Active managers try to choose the companies that are going to do better or worse and select them that way, and an index fund investor basically says I don’t know who’s going to do better or worse so I’m going to buy them all. And there are now index funds for every sector you can possibly imagine, which is why I make that distinction.
When I talk about index funds and the kind I recommend are broad-based index funds which were the originals that Jack Bogle created. An index fund that follows the S&P 500, that’s kind of the very first one that Bogle put out. I think that’s a great option, by the way. I slightly prefer the Total Stock Market Index Fund which is VTSAX which is the one I invest in and that’s the one I recommend, but if somebody for instance, in their 401K, has only a S&P 500 fund, that’s great.
I am not a fan of indexing that just looks at a particular sector so there are index funds just for financial assets or financial stocks or index funds just for mining and precious metals. I’m not a fan of those so when I say invest in index funds, I’m talking about only the broad-based index funds.
Scott: Now all three of us are, I think, on the same page in terms of favoring index funds over actively managed funds or individual stock picking in the market. But perhaps we can dive into the why behind that. I think you are really a thought leader in why this is such a powerful concept and why index funds are superior.
So I guess to start this off, what are the disadvantages as you see them to actively managed funds and individual security analysis as you see them, relative to index funds?
Jim: Well I think the problem with actively managed funds and by extension trying to pick stocks is it’s one of those things that it seems it should be easy to do. And yet, people who can do it successfully are vanishingly rare. You look at it and you say, if you look at the S&P 500 Index for instance, it’s very tempting to say well—in fact, I just saw an article of the guy making this exact point, saying I can go through that index and I can see companies that are clearly doing poorly—why not just eliminate those? If I just eliminate the dogs, by definition, I’ll do better than the index.
Or correlation, I can go through and just look at those in the Index 500 who are doing really well and just buy those and by definition, I’ll do better than the index. The problem is that things change. Today’s dog is sometimes tomorrow’s terrific turnaround story. You don’t own it, you miss it. Today’s wonderful high-flying stock that’s doing everything well and has made people a fortune is tomorrow’s crash and burn tragedy. You don’t know which they’re going to be and as it turns out, the research is unequivocal. It is vanishingly difficult for people to successfully make those decisions over time.
What makes it seductive is that every now and again, you get it right. And I can speak from experience that there are few thrills in life better than picking a stock and watching it steadily ratchet up. In fact, it’s so intoxicating that my observation is it leads a lot of people who do it to kind of forget the ones that didn’t work out too well.
And so they have an overstated sense of how successful they’ve been. The truth is that very, very few people statistically can outperform the market over time. In fact, you go out 30 years and the research suggests that the number of people who can outperform is less than 1%. Statistically zero.
Scott: So to play devil’s advocate here, what if playing the market makes me more—this is how I started. I started out by picking stocks and trying to beat the market. Mindy alluded to this earlier but she invested in a couple of Chinese companies because hey, a Chinese company has more cash than market value and no debt. Everyone except me seem to know that Chinese companies don’t have audited financials. But that’s okay.
Jim: There’s always a catch.
Scott: But you know, if my desire to pick, to invest more and pick stock winners gives me a higher savings rate, is that an advantage for stock picking, perhaps?
Jim: Scott, that’s really interesting. I never actually thought about it from that point of view. I think that if your goal is FI, the most powerful thing you can do is increase your savings rate. So if you said to me, gee, if I just buy index funds and it don’t engage me, I’m not going to be motivated to get my savings rate up. But if I can buy individual stocks, that can be a temptation.
The problem is that being successful picking individual stocks, as you just alluded to, can be so treacherous, and I’m hesitating a little but because as I said earlier, I actually achieved FI myself picking individual stocks and actively managed funds. But I look back on it and realized that I would have achieved that goal much more easily and much more quickly, had I adopted index funds sooner.
So again, it’s not a matter of choosing between something that’s terrible and something that’s great, it’s choosing between something that does work and can work, depending on how skilled you are at it, and something that is simply superior and easier and more powerful. So I don’t know. I think it would depend on your stock picking skills. Some people are better at it than others.
But if you’re really dreadful at it then it probably would overwhelm even the advantageous savings rate. But you know, if you’re decent at it, who knows. I would just say get over it. Get your savings rate where it needs to be at index, at least if you want to be FI.
Mindy: So I don’t think there’s anything wrong with picking a stock. I enjoy Diet Coke. It’s delicious. I own Coca-Cola stock. It’s not—I don’t own all Coca-Cola stock. I mean, not all of my investments are solely in Coca-Cola. I would like to own all of Coca-Cola.
Jim: I was about to say, if you owned all of Coca-Cola, you’d be doing quite well.
Mindy: I have to fight Ward for that. But that’s a company that I want to support. I think that it’s totally valid to choose a company that you want to support and buy their stock. Just don’t sink all of your money into it. And you can pick individual stocks and invest in index funds and I don’t think that that’s something that’s really discussed in the FI world. It’s always index funds are good. Picking individual stocks are bad. And you’re a horrible person akin to a child murderer if you pick individual stocks.
You know, and that’s obviously, Jim is—well, I guess I shouldn’t say obviously. I don’t know your sordid details and background, but you picked individual stocks and did very well. My husband has picked individual stocks and done very well, based to Jim. We are now switching over to index funds as we divest ourselves of these individual stocks but we’re still looking at other individual stocks.
Oh, this is going to IPO. Or when this does—or if BiggerPockets IPOs, I want to buy that because I support the company and I think they’re going to do amazing. But I don’t think it has to be an either or.
Jim: I agree with you and this certainly doesn’t have to be an either or and I, as you’ve already said, I have the disease. I don’t own any individual stocks at the moment. It’s been a couple of years and I’ve kind of resolved that I’m not going to do it anymore because I do think it’s a subpar thing to do.
The one thing I would object to in what you said, Mindy, is Coca-Cola doesn’t care whether you own their shares or not so I don’t think you are actually supporting the Coca-Cola company in any significant way. And I think when you mix—it becomes an emotional decision. You’re getting emotional satisfaction from owning Coca-Cola in addition to whatever economic growth you might enjoy. And I happen to be of the belief that you should separate your emotions from your investments.
There’s a saying that stocks are never going to love you back. So if you want to pick individual stocks because it’s fun and you think every now and again, you come across something that will outperform, and your husband Carl has done a remarkably good job of that. I know him personally and I know some of the things he’s chosen and so, by all means, go for it. I wouldn’t do it just to say I want to support this company or that company. I would do it if I say I think this is a company that has a chance to outperform the index going forward.
And I think you should always have that benchmark. One of the things that drives me nuts is when people say, well I’m going to pick individual stocks and I’m not going to bother to benchmark it because I don’t care what the index is doing. I only care about my stocks.
Again, taking the emotion out of it, there’s no reason to invest in individual stocks unless you can outperform the index. I mean, there’s just absolutely no reason to go through the time and work. I suppose you can make an argument and say well, if it’s something you enjoy doing, but there’s no financial reason to do it. So yeah, I would take the emotion out of it and I think if you see an opportunity to better—at least that’s how I did it with the individual stocks that I occasionally bought when I was indexing.
I discovered indexing about a decade before I finally accepted it. But once I accepted it, it’s some heavy lifting in my portfolio ever since and the individual stocks have just been kind of a fun distraction because I liked doing it.
Scott: The real reason, I think—the real power of index fund investing is when you look at wealth building from a very high level—top down—there’s really four things that you need to be doing to move towards FI. You have to spend less money, earn more money actively, achieve high returns or returns on your accumulate assets and/or start businesses or otherwise create assets from scratch.
You have to do some combination of those four things in order to go about this. And where active stock selection, picking individual securities is a real bummer, is it distracts you, particularly those early years when it can’t have that much impact on your ability to build wealth from the other things that are more powerful. From focusing on your frugality. From actively earning more income. From actually pursuing something that could produce more sizeable investments or returns like perhaps real estate or a business acquisition or starting a business.
When you have—let’s say you have a portfolio of $10,000 and you go through this exercise of picking winners in the market and instead of getting the average historical 10% of the stock market, you get 15%. You outperform by 5%. Well, you’ve just made yourself $500 over the course of the year. $500 is immaterial to your financial position. It’s immaterial to the goal that we all have here and we all share of achieving financial independence. You could have spent that time analyzing those stocks in a more productive way.
And that’s where I see the big problem with active stock selection or selecting an active manager or something relative to index fund investing is, your odds are you’re going to underperform or perform at exactly around the average if you just select stocks with kind of a dartboard approach. Or even if you do your own analysis, which has proven time and again in great books such as what I’m sure we’ll discuss in a little bit, to be no more effective than index fund selection and that is where the real crime is.
That’s where you’re doing yourself a real disservice. That’s where I do myself a real disservice is I wasted so many hours trying to learn about this and did not instead invest in index fund and actually build my financial position in a way that was more predictable. Is that a reasonable analysis in your opinion, Jim?
Jim: Well, I think people who invest in individual stock would take issue with it and they would say there’s greater potential than you allow for. But I would agree with you because it is vanishingly difficult over time to outperform the index. And so you are very likely to wind up investing a lot of time and effort analyzing the stocks, looking for them and once you own them, tracking them and what have you, only to if you’re lucky, match the index, much more likely to lag the index and the rarest of circumstances, outperform the index.
And if you look at professional managers, some of whom outperform the index for some short period of time, they typically are outperforming it by a percentage or two. And then the magic goes away. So I think that yeah, I would agree with you that it is a lot of found and fury signifying nothing in the end. And you would be better off just buying the index.
Actually, when my daughter was in college and I started writing the blog for my daughter and I wrote the book for my daughter and so whenever I write anything, I have her in mind and she’s one of those people who just is not interested in the financial markets and stocks and I have been trying to over the years, get her interested in it. She came home from college one day and I started, as is my one lecturing about this, and she stopped me and said you know, Dad, I understand this is important stuff. I just don’t want to have to think about it all the time.
And that was an epiphany for me because I realized I’m the odd one out. People like me who like this stuff, we’re the odd ones out. Most people have better things to do with their lives like you were just alluding to. So that’s another powerful incentive for index investing. If you just get a couple of things right in index investing, it takes up virtually none of your time.
You’ll outperform over the decades virtually everybody who is picking individual stocks, all the active managers. And you’ll do it with no effort on your part. You can go on and focus on your career or your hobbies or other kinds of income-generating things so yeah. Absolutely. I think it’s a great baseline.
Scott: All right, so you mentioned a couple of key things to do while you’re index fund investing. Let’s move onto those. What are the key things to keep in mind when you are looking to invest in index funds and be successful over the long-term?
Jim: I think the beauty of index funds is you don’t have to try to figure out which companies are going to outperform which other companies. So when you buy the Total Stock Market Index Fund, VTSAX, which is the one I have a preference for, you own virtually every publicly traded company in the United States.
So basically, what you’re investing in is the United States and if you believe the United States is going to continue to do well and prosper, that’s the bet you’re making. Now if you don’t happen to believe the U.S. is going to do well and prosper, then maybe you’ll want to rethink it.
You’re also betting on the world because the top U.S. companies are by definition international companies. So as the world is growing, as China for instance is growing, as Asia is growing, as Europe is growing, as Africa and South America are growing—even though you’re focused on U.S. companies, you’re benefiting from that growth. So you’re betting on civilization around the world continuing to grow and prosper.
So I think for my approach to make any sense, you have to buy into those concepts. I think that civilization is going to continue and I think the United States is going to continue for all of the problems that we have, is going to continue to be a major economic force in the world. The beauty of indexing is something that I call self-cleansing.
So what happens is unlike buying an individual stock or even a collection of individual stocks, the index fund, by definition is always changing. Small changes but always changing. As companies fail and begin to drift away, they fall off the index. Because a company has to be of a certain size to be on the index. So the losers tend to drift away. At the same time, new companies are always being formed and as you mentioned, BiggerPockets might IPO at some point—
Mindy: Speculation. Speculation.
Jim: Speculation. But if that were to happen, then that’s another publicly traded company in the realm. And I don’t have to guess whether BiggerPockets is going to do well or not if it IPOs. I’ll be along for the ride. And if it explodes and becomes the next Google, I’ll benefit from that. If you guys don’t and you fade away, then that’s okay.
Now here’s the beauty of this. The companies that fade away can only lose a maximum of 100%. That sounds like a lot. But on the other side of things, if BiggerPockets skyrockets, its growth is unlimited to 100% or 200% or 500% or 10,000%. So you have a rigged game in the sense that the winners have no limit to the upside and the losers do. So that’s what I mean by self-cleansing.
Scott: So we have a couple of key assumptions to this philosophy which is one that you’re betting on civilization to continue to grow and prosper. You understand that hey, these companies can only lose 100% of their value but they can grow at multiples of that. What if you think that civilization is going to grow and prosper but not for the next five to seven years? Should you stay out of the market and wait or what’s your kind of timeline that you have for investing in the index funds here?
Jim: So here’s the thing. I get this question on the blog all the time and especially in times like these when the market has been doing well for a number of years—if you think the market is not going to do well for the next five to seven years, then sure. You should probably stay out of it. It’s your choice. It’s your money. I would suggest to you that you really haven’t got a clue because nobody has a clue because nobody can predict the future.
I have no idea what the market’s doing right now for that matter, or tomorrow, what it’s going to do tomorrow or next week or next month or next year. Or even the next five years. I’m fairly confident if you go ten years out, we’ll be rewarded for holding the index. If you go 20 years out, it is very rare, a 20-year period, where you are not rewarded. So if you look out in the long-term, investing in the stock market works out very, very well.
And that’s the only way, by the way, you should consider investing in stocks. If you are investing and you’re thinking you’re going to need the money in five years or seven years, it probably doesn’t belong in the market. Nobody can predict the future.
Scott: I think that’s great and I think the key there is yeah, if you’re not investing for the long-term, which I almost consider it to be an infinite time period that I’m investing for because you alluded to this in what you’re saying—the longer the time period you hold, the more statistically certain you can get that you’re going to be rewarded with the long-term market average return, historically, right? If that’s 10% and you’re projecting something out, well it’s almost impossible to project out three to five to seven, even ten years.
But as you get farther and farther out that trend line, mathematically I can be more certain that I’m going to be close to that long-term historical average, which kind of gives me an interesting philosophical bent in terms of risk because I actually perceive having bonds as risky in a long-term portfolio. Because they lower the total return that I might get for my portfolio over a 30-year period. Kind of in a similar vein to what you’re talking about here. Do you agree with that assessment? Am I off track here?
Jim: I agree absolutely with everything you said, word for word. So first of all, my holding period for VTSAX is forever. The only time that I ever sell shares is now that I’m living on the portfolio, I pull the dividend out of it and then I sell a few shares to make up for whatever I need to spend. But other than that, I’m never going to sell VTSAX. And it is going to pass onto my heirs intact and with the recommendation that they never sell it.
So it is truly something. So I invest, by the way, not for my own lifetime—this is another area where the advice I give diverts from what you might typically hear because I’m not investing just for my life, I’m investing forever and for hopefully multiple generations that will just continue. And as long as civilization continues and as long as the U.S. is an active and viable part of that civilization in the world, VTSAX is going to do well. I am never going to sell it because it drops temporarily. It just doesn’t make any sense.
So I agree with that. On the question of bonds, you’re also absolutely right. Bonds are simply there to smooth the ride because stocks are extraordinarily volatile. So there are times when stocks plummet and sometimes they plummet brutally as we saw in 2008-2009 and that is gut-wrenching. And bonds smooth the ride. Now, when you’re young and you’re working and you have a high savings rate and you have cash flow going in, I don’t think you need bonds because that cash flow allows you to take advantage of those periodic drops. You should welcome them.
For people your age, you should be looking for the market to crash because it’s nothing but a golden opportunity as long as you don’t lose your nerve and as long as you keep investing in it. So that cash flow from your earned income is how you smooth the ride. When you give up earned income because you retire, whether you retire early or later, whatever over time, and you don’t have that cash flow, then maybe you’ll want to consider bonds to smooth the ride then when the stocks plummet, you’ll have the bonds to provide a source of capital to take advantage of those lower stock prices that you rebalance. So that’s the role bonds have.
One of the questions I get every now and again and on the blog, for instance, I why do you recommend the Total Stock Market Fund, the VTSAX, which is what I recommend, when this bond fund did better. It’s got a higher yield. Well, bonds are not in my portfolio to enhance my performance. They’re there to smooth the ride. If I want to enhance my performance, I simply adjust my allocation and have more stocks. Because as you pointed out, over time, stocks are going to dramatically outperform bonds.
So when you buy bonds, you have to understand that you are buying a ballast, if you will, that will smooth the volatility of your stocks. But you are paying the price for that and the price that you are paying is a lesser performance over the decades. Does that all make sense?
Scott: Oh, I think it’s fantastic. I agree completely and that is exactly how I’m approaching my own personal portfolio.
Jim: Yeah, well done.
Mindy: Okay, I want to go back to something you just said a moment ago. You said at your age, you should hope for the stock market to crash, which is not common advice that you hear from people. Gosh, I hope I lose a lot of money. You wrote an article called How I Failed My Daughter in a Simple Path to Wealth. I love the title but it makes me kind of sad. You didn’t fail your daughter but the article is really fantastic and we’ll link to it in the Show Notes at BiggerPockets.com/MoneyShow20.
In this article, you give your daughter the simple path to wealth, nine basics. One of them is—”realize the market and the value of your shares will sometimes drop dramatically. People all around you will panic. They’ll be screaming, sell, sell, sell. Ignore this. Even better, buy more shares”.
I have a friend who worked for a company that was acquired by Google in 2006. He was there for a few months. He was let go after that with some weird thing, and he pulled all of his money out of his investment funds and it was just sitting there like in a savings account or something. It wasn’t a savings account but it was like not gaining any money.
But 2007 happened. The stock market went into the toilet and he lost out on all of that drop. He didn’t put it back in the market so when the market going back up, he also lost out on all of that growth. And in 2008-2009, I guess a little bit later than that, 2012, the stock market really just went through the roof and losing out on all of that growth really hurt his portfolio. And I think that a lot of people see the, oh, it’s down, I should sell. No, it’s not down. You should buy more because now stocks are on sale.
Jim: Yeah, absolutely. I think stocks are on sale and I think one of the critical things, and I think this actually goes back to a question that Scott asked and I only answered part of, but one of the critical things you need to understand if you’re going to be in the market is that the market is volatile and periodically, it does plunge. And unfortunately, whenever that happens, the media just goes absolutely nuts. You would think it was the end of the world.
I have a post I put up a couple of years ago now when the market went down 10%. 10% is what’s called a correction. It’s a small bump in the road. It’s perfectly natural, even welcomed. And the headlines that I was seeing were “Bloodbath on Wall Street”. Like, really? Bloodbath—that’s the title of the post. Maybe you can put it in the Show Notes. But it’s amazing to me how insane the media goes when the market drops a little bit. And you would think that it’s truly the end of the world and it’s certainly the end of the stock market. And it never is. And someday, maybe it will be but then where you’re investing won’t matter because it will be the end of the country or the end of civilization.
The market always rebounds from those plunges but you would never know it listening to the media because there’s panic everywhere. And you just have to ignore the noise. If I could leave one message for our listeners who decide to invest in index funds as I recommend, it would be that market drops are normal. They are absolutely normal.
I guarantee you, as I think I said in that post you were referring to, I guarantee anybody listening to this that over the next 10, 20, 30, 40 years, the market’s going to plunge 10% on a regular basis. 20% on a pretty common basis and that’s considered a bear market by the way. 20% is the correction. 20 plus percent is a bear market. It’s going to plunge a few times in that 40-year period by 30, 40, 50%. That’s considered a crash. This is normal. This is normal. And if you are going to panic and sell when that happens then my advice is going to leave you bleeding by the side of the road.
In fact, the most recent edition of my stock series, which I just put up about a month ago is why you shouldn’t be in the stock market. Because if you panic and sell when it drops, if you listen to the noise and all the panic, then you would have been better off not being in the market at all. So I think you need to fix in your mind, as they say in that post, you need to tie yourself to the mast. And you need to fix in your mind that selling is just not an option when the market drops.
Because if you do that, then it’s game over. And that’s how most people wind up being losers in the stock market. And that, I think, is the third post in the stock series is why most people lose—third or fourth, somewhere in there—why most people lose money investing in stocks. Because they panic and they sell instead of taking advantage and buying at discount prices.
Scott: This brings up kind of an interesting dilemma. So I have the good fortune of starting basically from scratch, which is a big advantage. A lot of people start with debt, a lot of student loan debt. I started pretty much from zero with a college degree because I’m very fortunate. Now, when I would be investing, I would put chunks of money into an index fund and I have consistently over the years and I will continue to consistently do so.
And that’s a form of dollar-cost averaging. I’m not really dollar-cost averaging, which I think the strict definition is putting in the exact same amount of money over a very consistent time period. Mine is just more like every time I have excess cash, I throw it into an index fund or my real estate savings for my next property.
Suppose that I had accumulated $500,000 in lifetime investible assets. And I’m listening to this podcast and I’m like hmm, I really want to move all of that into index funds away from these hodgepodge individual stocks and actively managed funds that I’ve accumulated. Do you do that all at once or do you have a strategy for folks that have already accumulated a stockpile of money and how they should get into the market?
Because it seems like it would be a shame—I don’t want to time the market but it would be a shame if I put all of that money into the market right now and then it crashes 50%. That seems like it would be too much for me to handle kind of mentally. So is there kind of a strategy for that type of person to kind of dip their toe in and get all of that money invested eventually?
Jim: So you covered, as you tend to in your questions, Scott, you covered a lot of ground.
Jim: That’s okay because it’s all good stuff. It’s just hard for me to remember it all as I’m responding. But starting with the last part first, this post I have about why you should not be in the stock market, which is the most recent one on my blog, and the most recent one in the stock series, talks about exactly that.
But you started out by saying, so you said a little bit of two different things. So you started out by saying well what if I had been investing in actively managed funds and individual stocks and I’ve got a bunch of those? And I have come to the decision that indexing is really the better way to go, how do I do that?
That, by the way, reflects exactly what I went through because as I said earlier, I had been investing in individual stocks and mutual funds and finally, after ten years, after first becoming aware of index funds, I finally accepted how incredibly powerful they are. In that case, you can move it almost all immediately because you are going from one kind of stock investing to another. So you’re not involved at all in that overall market risk that you were referencing.
The only caveat to that is if you own these things in taxable accounts and you’ve had them for a while and you’re sitting on significant capital gains by shifting all of these things into an index fund, you may trigger a very large capital gains tax. And there’s no pat answer for that but you’re going to want to be aware of that and think through how you do that. So that might imply that you move some things gradually over time to keep that capital gain from bumping you into higher tax brackets and that kind of thing. But that’s a tax issue we spent a lot of time on.
The more common part of the question you were asking here is people who for whatever reason are sitting on a large chunk of cash and they are concerned. They say, hey I kind of like this index idea, but the market’s been doing nothing but going up since 2009, which is true. And you know, I don’t want to invest and have it fall 50% the next day. And of course, obviously, that’s going to make you nervous.
But I would suggest that you think about it so the solution to that, by the way, is frequently classic dollar cost averaging. Let’s say you’ve got to make the math easier—you’re sitting on $120,000 and that’s a lot of money to you. You say okay, I’m going to put in $10,000 a month over the next year and dollar-cost average my way slowly in and that way, I don’t get hurt if it drops tomorrow.
Well, that only works if in fact that market drops over the next 12 months. Because otherwise, you’re simply going to wind up buying your shares at higher and higher costs, month over month, if the market continues to go up. And by the way, the market goes up three out of four years on average, so the odds are much higher that you’re going to be investing dollar-cost averaging into a rising market than into a collapsing one.
But secondly, even if you do that and 12 months later, you’re fully investing, who’s to say that the day after you send in that last check is not the day that the market drops 50%? And the point is that if you’re invested now in today, and it drops 50% tomorrow, you’re going to have the same kind of pain. So when people ask that question and they make this point in the post I just put up, what is really tells me is that they’re not psychologically ready for the rollercoaster ride and volatility that the market is.
Because it doesn’t matter if you’re sitting on cash or if you’re sitting on $120,000 worth of VTSAX, the risk that it’s going to drop 50% tomorrow is exactly the same. And if that risk keeps you up at night, then you probably shouldn’t be investing in stocks. Does that make sense?
Scott: Yeah, absolutely. So mathematically, you’re saying that you’re better off statistically on average in the long run, of investing all of that cash at any one point in the market, rather than spreading it out because the market is going to be consistently rising throughout that normal period. So every day you wait, you’re giving yourself slightly lower odds of accumulating wealth over time. So you invest it all immediately and move on with it, counting for tax advantages is kind of what you’re arguing.
And I kind of agree with that assessment except for with the slight caveat of the psychological thing, which maybe I’m not ready to invest in the stock market. Where if that is all of your lifetime accumulated assets and you can’t afford to lose that for whatever reason in the short run, then your financial position is not capable of sustaining a loss if you’re dependent on those resources to make it through some period of time.
Jim: If I can interrupt you there for a second, if that’s the case, then definitely you shouldn’t be in the stock market. Again, the only way to invest in the stock market is for the long-term. So any money you have that you’re going to need in the next five years, clearly you shouldn’t be investing that in the stock market. The point is that at any given point in time, the odds are that the market is more likely to go up than down because it goes up more often than it goes down.
But that doesn’t mean—at some point, it will plunge. It could be plunging as we’re talking now, I don’t know. At some point, it could plunge and there might be somebody who invests a large lump sum of money the day before and hits that proverbial drop. What I would suggest is that person is no worse off than the person who invested a year ago and now is sitting on $120,000 worth of VTSAX that suddenly gets cut in half.
If you’re invested in the market, you just have to be prepared psychologically to wake up on any given day and see that your holdings are worth less than they were the day before. But you have to realize that you still own the same percentages of all those companies. You still own the same piece of the rock, as the insurance company used to say, and that hasn’t changed. And now you have the opportunity to buy more of it at lower prices.
So yeah, my advice—I have a post maybe you can put it in the Show Notes along with the most recent one, something to the effect of investing in a bull or in a raging bull, which was a response to a question I got very much along these lines based in 2013. They said there’s no way the market can continue to go up from here. It’s been going up since 2009. Well, here we are.
And by the way, I didn’t know that. And as I say over and over again, I don’t know what the market’s doing today or tomorrow or next year. But since you don’t know that, it can’t inform how you go about investing.
Mindy: Okay, so you’ve said a couple of times, if you need this money in the next five years, you shouldn’t be in the stock market. Where should you be?
Jim: Well it depends on what you need the money for. And I wouldn’t make an entire sweeping generality along those lines. So let’s look at this in an example, if you will. First of all, to answer your question more directly, you’d be in the money market fund or a savings account if you definitely need the money in the next five years.
Let’s suppose you came to me and you said, you know, Jim, I’m saving money for a down payment on a house—
Mindy: And that’s what I was going to say because that’s where real estate site and a lot of people ask that, what should I do with my money while I’m waiting for it to grow to a down payment?
Jim: Which is why I chose that as our example.
Mindy: It’s like you’re a mind reader. Oh, maybe you can predict the market.
Jim: No. It’s just that I know a little bit about what BiggerPockets is all about. So you come to me and you say, hey Jim, I’m saving money and I’m saving for a down payment on a house and I want to buy this house in five years. At my current savings rate, I’ll have the down payment I need. Should I put this money into the market? And I’m going to say basically no, you should have that money in a savings account.
Then you might say to me, well yeah but Jim, I won’t earn anything on the savings account. The market does so well and I’m willing to take a chance. Then I’m going to say to you, well, Mindy here’s the deal. You can certainly put money in the market for your down payment. You just have to understand that the wind might be in your face and you might not be able to buy the house in five years.
On the other hand, if the wind suits your back, maybe you can buy the house in three years. And it really depends psychologically on how important that five-year goal is to you personally. So if you said to me, you know what? If I couldn’t buy it after five years, and I have to wait seven or eight years, I’m okay with that.
Then I’d say sure, maybe you should put some of it in the market. Maybe you can do a 50/50 blend with stocks and bonds, which isn’t as aggressive and volatile as all stocks but it’ll give you much better potential return over five years than a money market fund or a bank account.
So you can play with that depending on your own needs and your own psychology. But fundamentally if you say to me, nope, I want to have that house in five years, it’s really important to me. I’m going to say well you just need to give up returns and focus on just saving in the bank.
Scott: So can I put a spin on that question? What if I said, Jim, I’d really like to give myself the best odds at being able to purchase that house as quickly and as practical? Would you then change your advice to yeah, invest that money into an index fund and sell it and pull it out when you’re ready to buy that house.
Jim: Well Scott, I’d have to respond with a question and say how heartbroken are you going to be if the wind winds up in your face and it takes you eight years instead of five or three? And if you say well gee, Jim, that’s intolerable. I’m going to say well—but if you say to me you know, that’s all right. I’m willing to risk maybe it taking eight to ten years if I can get it done in two or three. It’s, do you feel lucky, punk? Well, do ya?
Scott: I think it’s more like I suspect you’re similar to me in a way like this but I always look at things and like, okay, I made the correct mathematical logical choice and I can live with it if it happens to not work out in my favor as long as it’s not a devastating—as long as it doesn’t wipe me out. Bankruptcy is kind of an intolerable, impossible outcome so I try to stay as far away from that possibility as possible.
But if I have to delay something for a few years and that’s the risk in exchange for getting it sooner, I’d tend to take that and that’s why for several down payments, I actually did invest that money into the index funds and I knew that exactly what you were talking about is a possibility, but I was willing to live with it and live with myself if it took me a lot longer to get to my goal because I thought, hey, the math is on my side in terms of helping me get to my goal sooner if I approach it this way.
Jim: Yeah and I think the fact that you said your multiple down payments also indicates that you were buying investment real estate and so, that is probably more flexibility perhaps than saying gee, in five years, my kids are going to be entering grammar school and I want to be in a certain school district so I want to buy a house. That’s a much harder deadline than saying well, if I can only accumulate this investment real estate in eight years instead of five, that’s not the end of the world.
The only caveat, Scott, that I would put out there is that for most of the people listening to this podcast, the volatility that we have seen in the stock market, while some of it has been brutal like in ’08, ’09, or even ’87, it’s been fairly short-lived. That’s not always how things evolve. There are times when the market goes down and it stays down for years on end.
It takes a lot longer so you have to understand that if you’re going to do what you did and invest in the index fund with an idea of accumulating a down payment, that it’s not just a matter of it may take you a couple of years beyond year five. It may take you considerably longer. It may mean that you’re not going to own a house in the next decade or so, or plus. So there’s always that possibility that we could get a long, protracted drop and the market, as you saw in the late ‘60s and through the ‘70s. Or just a flat market.
Scott: Great perspective.
Jim: Yeah. The market is fundamentally, it’s a long-term game. If you invest in broad-based index funds which is what I recommend as we talked about earlier, your holding period mentally should be forever. I mean, that’s—and investing in it to help you get to another short-term goal, I’m not entirely opposed to depending on how much risk you’re willing to take. But it’s a different bit of analysis before you pull the trigger on that.
Scott: I think that is great.
Mindy: I think this is fantastic. Jim, thank you so much for taking the time to share this with us. You’ve given some real solid reasons for investing in index funds over picking stocks and I think that, I really like your quote, oh my daughter said, Dad, I don’t have any time for this. She is the norm. Nobody has time for this. Nobody cares. It means so much to me and nobody else cares. Oh, you can watch their eyes glaze over as you start talking about interesting things.
Jim: And by the way, thank God for the benefit of the world. I mean, my daughter’s going on doing much more important things, making the world a better place. Most people, they have bridges to build and companies to run and diseases to cure and scientific breakthroughs to come through and podcasts to put out. But the beauty of investing is that if you keep it simple, it doesn’t have to take up much or really any of your time, very little of your time. And unlike many things in life, the less effort you put into it, once you understand and implement a few basic concepts the better your results will be.
Jack Bogle is famous for saying it—what you should do is buy the index and forget about it and then 20 or 30 years later—don’t even open your statements and 20 or 30 years later, when you open your statement, make sure you have a cardiologist standing by because you’re going to be shocked at how well you’ve done. Anyway.
Mindy: Well, we just have a few more questions for you before we let you go. We have taken up quite a bit of your time today and I could talk to you forever because I really enjoy listening to you.
Jim: And I could talk to you guys forever. This has been a blast.
Mindy: And this has been really informative. I hope everybody listening has gotten as much out of it as I have. I’m probably still—but we have fun, yeah. But you know, if they had fun too. I’m probably still going to buy Coca-Cola though. I’m not going to take the emotion out of it. But that’s a good point.
We have a few more questions for you. These are the same questions we ask everybody. We call them our Famous Four because there’s five. Question number one is what is your favorite finance book? And I would just like to say that I think it was two episodes ago, The Mad FIentist was on and he recommended a little book called The Simple Path to Wealth.
Jim: I’ve heard great things about that one.
Mindy: I’ve heard great things, too.
Jim: Well assuming that you don’t want me to recommend my own book, I think one of my favorites is actually The Richest Man in Babylon. I hesitate recommending it because it’s a very small book. It’s told as a parable, not surprisingly, the richest man in Babylon is basically explaining to some of the Babylonians who decide hey, we want to be rich so maybe it makes sense to talk to the guy who is rich.
My hesitation is that the lessons in it are so simple and the book itself is so small and short and easy to read that people might not understand how profound it is. So it’s a book I highly recommend but it’s a book that will take you very little time to read but should take you a lot of time of reflection once you’ve read it.
Mindy: So I actually like that it’s a short book. It’s a good introduction—although I do want to say that it’s written in King James Bible version, Shakespearean language, which I love so I enjoyed the book very much. I thought it was unbelievably profound because it was written a hundred years ago and they’re saying the same things. Spend less than you bring in. Invest with people who know what they’re doing.
Jim: Pay yourself.
Mindy: Pay yourself, yes. All these things that everybody’s telling you now and they were saying it a hundred years ago. Like it’s not hard to figure out money.
Jim: Or as the book implies, they were saying it 5,000 years ago. Right? I mean, that’s a great point, Mindy. This is not new stuff. I mean, what we talk about in the FI community is things that our grandparents knew. Be frugal. Don’t spend money you don’t have. I mean, how basic is that? How bizarre is it that we live in a culture that takes as normal the idea of spending money we don’t have? Credit cards, borrowing money. I mean, that’s a bizarre new concept. Your grandparents would have been horrified at the idea of spending money you don’t have. I’m horrified at it.
Mindy: And yet you saying it is weird. You’re bringing this up. How weird is this that it’s okay to do in this society? Yeah, why would you even think about that? That’s the norm.
Jim: Right. Now we’re the odd ones out. Yeah, this is not—the basic concepts which are save part of what you earn, spend less than you earn, invest the difference. I mean, you find this in the Bible. This goes back thousands of years. And that was the point that—I forget the name of the guy that wrote The Richest Man in Babylon but that was the point he was making. It wasn’t new a hundred years ago when he wrote the book.
Scott: I love it. I also love that book and I’ve read it probably three or four, maybe five times.
Jim: Yeah, exactly.
Scott: Because it’s just so easy to read and it’s so perfect.
Jim: The only thing that I object to in the book is he recommends saving 10% of your income and I think that’s too low.
Mindy: 10% is better than nothing.
Jim: Absolutely. And it’s certainly better than going in debt and paying 18% to the credit cards.
Scott: All right, what was your biggest money mistake?
Jim: Hmm. Well, there are so many from which to choose. But I would say, my single biggest money mistake is as I alluded to earlier, it took me a disturbingly long time to see the full value of indexing.
The great irony is that I had started investing in 1975, which as it happens, is the same year that Jack Bogle founded Vanguard and came out with the first widely available index fund. So theoretically I could have been indexing from the very beginning of my career and my life would have been so much easier and I’d be so much further ahead of the game.
But I didn’t hear about indexing in 1975. I did hear about it in 1985 and even if I had embraced it then, I’d be far ahead of the game but as I said earlier, it took me a good decade plus to really accept the value of it. And this is an important point because I think there are a lot of people today who are resistant to it.
And it seems so counterintuitive as we talked about earlier that you can’t outperform the market simply by avoiding the dogs or focusing on the high performers. But the research is definitive. I mean, trying to outpace the market just doesn’t work over time. So that’s my biggest mistake. I wish I had embraced indexing much, much earlier.
Scott: I love how it’s an opportunity cost rather than a “I bought this fancy doodad that I shouldn’t have”. It’s, I invested sub-optimally and that’s what cost me tons of money.
Jim: Well, that’s part of it, Scott. But the other part of it is that because I was in indexing and I wasn’t investing in other things, I have a whole litany when I said there are so many to choose from. I have a whole litany of like Mori International, my goldmining company.
Scott: Not my Chinese fruit company.
Jim: Like your Chinese fruit juice company. That indexing gives you all kinds of opportunities to make financial mistakes.
Scott: That’s awesome.
Mindy: What is your best piece of advice for people who are starting out? Oh, hold on. I’m going to look into my crystal ball and say invest in index funds?
Jim: So, it’s interesting. When I was at Chautauqua last year which is the annual event we put together. We take people to an interesting place and I give a talk there. Somebody had asked me a question earlier along those same lines and so it was like, you know, how would you sum up your philosophy in a sentence or two?
What I came up with and what I introduced at my talk at Chautauqua was basically when you go through my blog and my book, the fundamental message is, buy VTSAX. Buy as much as you can whenever you can and hold it forever. And that’s actually what Scott was saying earlier that he does. He buys indexes. I don’t know if he buys VTSAX or not but he buys whenever he can, as much as he can, then he holds it forever. VTSAX, by the way, is Vanguard’s Total Stock Market Index Fund.
Scott: And that’s the one I’m going to start switching to but I have in the past been buying VOO, which is their S&P version.
Jim: Which is fine. I mean, the S&P 500 is—Jack Bogle himself owns the S&P 500 fund so the S&P 500 makes up about 80% of VTSAX. If somebody says to me, I own the S&P 500, you’re doing great. Don’t lose any sleep.
Scott: Yeah, it’s been good.
Scott: All right, this is the most difficult question of our Famous Four/Five. It is, what is your favorite joke to tell at parties?
Jim: Do you want a short joke? A normal joke? Or a shaggy dog story?
Scott: How about a really long joke?
Mindy: Scott is underestimating the amount of time Jim can talk.
Jim: Yes, absolutely. When I say a shaggy dog story, we’re talking about a 10-minute commitment.
Scott: Let’s poll our users real quick.
Mindy: They’re all saying short to medium, please.
Scott: Aw, all right. Fine.
Jim: Mindy, this morning actually, I was listening to the beginning of your interview with Alan Donegan and I heard you recite the term [Inaudible][69:03] which flew in and boy, are my arms tired.
Mindy: And Scott didn’t even get it.
Scott: It took me a minute.
Jim: So that is a terrible joke but along the lines of a short joke of that kind, I will tell you the world’s perfect joke. This is the world’s perfect joke and it has the benefit of being very short. There are two muffins and they’re in an oven and the oven is starting to warm up and the one muffin says to the other, man it’s getting hot in here! And the second muffin says, holy crap! A talking muffin!
Jim: Perfect joke.
Mindy: Perfect joke, that was a delightful joke. Thank you for not making it a pun.
Scott: Every once in a while, our guests don’t have jokes so I always have one prepared and this week it was going to be about a pizza but I’m glad I don’t have to tell it because it’s kind of cheesy.
Mindy: Oh, no.
Jim: I’ll tell you the ten-minute Moose Turd Pie joke.
Mindy: Oh, Moose Turd Pie, well I am going to go on vacation with you this year, Jim, and I am going to make you tell me that joke in Greece.
Jim: That sounds good. It is a joke best told in person.
Mindy: Moose Turd Pie. I can’t wait. That sounds awesome. Jim, where can people find out more about you?
Jim: Well I don’t know anybody who wants to find out more about me but my blog is the JLCollinsNH.com and if you go to the blog, you’ll find everything I’ve written and there’s a button at the top titled “Stock Series” and that’s what the blog is most famous for and I think there are 32 now? If I’m not mistaken, articles in the Stock Series. And then I list some other posts that are relevant to that that people can look at and once you’re on my site, you’ll see a link to my book, The Simple Path to Wealth and if somebody is interested, they can go and do that.
I always tell people that there is nothing in the book that is not on my blog and that’s very intentional. So you don’t have to buy the book to get the information. The book is better organized and it’s more concise and the writing, I won’t say the writing is better but it is more polished in that I spent more time polishing it. But when I was writing the book, it was very interesting, people were saying, be sure you put things in the book that’s not on the blog so people have to buy your book. And I thought well that’s kind of crappy. I don’t want to do that to my faithful blog readers. The book in large extent exists because I had an audience for the blog. So anyways.
Scott: And I’ll chime in that there is an audio version of the book as well read by this guy with a very soothing, deep voice that puts James Earl Jones and Mufasa from The Lion King to shame. You can also check it out at Audible.
Jim: Well yeah, it is read by me and when the Audible people suggest that I read it, I said well I’m happy to do that but I’m not a professional narrator so understand I’ve never done this before. And they said, no, no, no—people will want to hear it in the author’s voice. I said okay, so we did it. And if it sounds good, trust me when I tell you the credit belongs to the editors because what I actually recorded was one hot mess that they had to sort through. But I haven’t listened to it myself. I’ve had enough of it recording it so—
Scott: No, this has been fantastic and awesome. We really appreciate you coming on and sharing this stuff. We had such a great discussion here. Love it. I hope that people go check out your blog and your book because of the show and do the right thing which is probably invest in index funds for the long-term.
Jim: Well first of all, I had a blast hanging out with you guys. I am truly honored that when Mindy sent me the e-mail asking me if I would do it, I was thrilled to get it and it’s an honor and it has been just so much fun hanging out with you so thank you.
Mindy: I was very honored when you said yes.
Scott: We were honored when you said yes.
Mindy: We—yes, I’d like to exploit my friendships and say hey, can you come on my podcast? But I’m always a little nervous. No, I don’t do those or no, I don’t have time for your little piddly nothing—oh, okay. This is awesome. James said yes. It’s not little piddly. It’s amazing. Best show ever is what I think I’ve heard.
Jim: And Mindy, you know I will always say yes to you.
Mindy: Woohoo, we’ll see you next week. It’ll be the Jim Show.
Jim: That works for me. No, I would be happy to do it again. You probably don’t want to inflict this on your audience next week but give them a few months to recover and we can do this again.
Mindy: That would be awesome. Okay, Jim, thank you so much for your time and we will see you again soon.
Jim: I will look forward to talking to you again and to listening to this when it comes out.
Jim: Good luck to your editor.
Mindy: We have a great editor. Shout-out to Dave for making us sound beautiful.
Jim: Well, you’re going to need him for this episode.
Mindy: Okay, Jim, I hope you enjoy your day and we will talk to you later.
Jim: Always a pleasure and enjoy your celebration this afternoon.
Mindy: Thank you.
Mindy: Thank you very much.
Jim: All right. Byebye.
Scott: All right, that was Jim Collins. Mindy, what did you think of that episode?
Mindy: Jim blows my mind. All these people tried to game the system, beat the market, and you can’t do it. Jim was like look, just set it and forget it.
Scott: Well Jim did game the market, right? What I think is fascinating about Jim is Jim did game the market. He did try to pick actively managed funds. He did try to pick the winning stocks. And he succeeded in achieving financial freedom in doing so yet has the wisdom to go back and be like, you know what? I actually slowed myself down a bit. I could have done it faster if I had just stuck to this very fundamental passive boring index fund strategy, I would have been in the exact same position even sooner.
Mindy: Well so, in that respect then he didn’t beat the market. He just did well.
Scott: Yeah. I think it speaks to the fundamentals that achieving financial independence is first and foremost a function of your savings rate and not your investment strategy, which I think is kind of a powerful insight. Your investment strategy is secondary to that savings rate.
As long as you invest something that has the potential to help you grow fairly quickly, be it real estate, be it stocks, be it bonds, be it actively managed funds with high fees—you will build wealth over time if you have a high savings rate and continually invest in something that has a reasonable shot at upside. But you can do it faster and better and easier and more passively with index funds, I think is Jim’s point. And a point that you and I would agree with.
Mindy: That’s a really great place to leave this. I think that’s a really great place to leave this discussion, to end this discussion, Scott. Jim just dropped knowledge bomb after knowledge bomb and that pretty much sums it up. You can do it in a multitude of ways but you can do it faster and cheaper and easier with an index fund.
Scott: Yep, love it.
Mindy: All right, for episode 20 of the BiggerPockets Money Show, this is Mindy Jensen, over and out.