Today I’m excited to share with you this site’s first book review, and I can’t imagine a better book to start with: The Simple Path to Wealth by JL Collins. Collins began his foray into personal financial writing back in 2011 and has developed a tremendous following over at jlcollinsnh.com based on a series of posts he wrote about investing in the stock market. This book is the natural outgrowth of those excellent posts.
It’s difficult for me to say enough good things about this book, because it’s just so well done and simplifies the sometimes scary world of investments so beautifully. Anyone can read this book and feel confident in their investments based on a century of market history.
For those familiar with another of my favorite books, Your Money or Your Life, this is the book you’ll want to read after you’ve completed that book’s steps about reorienting your life out of mindless consumption, eliminating your debt, and you are ready to begin or you are already investing toward financial independence.(Although Collins does touch on debt and basic principles about spending money, this book mostly assumes you already understand those concepts and are ready to get rich.) The books are really perfect complements for each other. Put another way, The Simple Path to Wealth is one of two pillars everyone who wants to take control of their money should read. Your Money or Your Life addresses the why of money, and The Simple Path to Wealth addresses the how of it.
The basic premise of the book, unlike many in the personal finance wealth-building sphere, is not early retirement — Collins says he has always enjoyed getting paid — but providing the ability to tell any employer “F-You” and mean it if necessary. He relates how he first had this experience at a young age when he had accumulated the sum of $5,000 and requested several months of unpaid leave from his employer to travel around Europe, something unheard of at the time. His employer said no. After thinking about it, he told his manager he was quitting. And that’s when things got interesting for Collins. His employer told him not to make any rash decisions, and he ultimately negotiated for six weeks of leave for his trip. He thus learned early in his career that the ability to negotiate from a position of strength with one’s employer is an incredibly valuable tool. He had his first “F-You” money early in the game, and has spent the rest of his life developing strategies to grow his wealth so he could always maintain this negotiating position. He succeeded. And he believes you can, too.
Collins, like the founder of Vanguard, Jack Bogle (also one of Collins’s personal heroes), advises individual investors be content with the return the entire stock market provides on a year-to-year basis, no more, and no less. And to get the market return each year, Collins has a simple strategy that involves just two index funds with rock bottom expense ratios, getting your returns as close to the market return as possible: VTSAX (Vanguard Total Stock Market Index Fund) and VBTLX (Vanguard Total Bond Market Index Fund). He recommends going full throttle into VTSAX (or an equivalent fund in your 401(k)) for the pure simplicity of it during the wealth accumulation phase of your life, but acknowledges that by doing 10-25% into VBTLX, history indicates one might be able to get slightly better returns. (For many, the added complexity may not be worth the minuscule edge it provides.) By adjusting the balance of these two funds throughout your investing life, it’s possible to get the market return, beating something like 99% of mutual funds over a time span longer than just a few years, with the minimum possible effort. Simple.
But not easy. He’s going to ask you to toughen up a bit, and take the long view of the markets. To quote one of his readers, to “stay the course with a side dish of a panic.” By getting your mind right about the market, you can stay in it and reap the stunning returns that the market provides—11.9% per year on average since 1975! Obviously, that number is always on the move and shouldn’t be one you count on for future returns, as no one knows what the future holds. But it’s a breathtaking number compared to just about any other investment vehicle one could have invested in over the same period. And, as Collins writes, over the long haul “the market always goes up.”
Part of what makes Collins’s writing about investing so compelling is that he has been doing it for 40+ years and has had, essentially, a lifetime of F-You money enabling him to do the work he wants to do. Collins explains from deep experience, simplifying in the way only someone who has an extreme depth of knowledge can. He explains the value of stocks by comparing them to a beer’s head of foam and the beer itself, making a basic but essential concept delightfully fun to read. He uses the parable of the monk and the minister to explain how being financially independent prevents one from being overly servile. And because he has successfully done so over the course of his life, Collins offers a rare and unique perspective that rarely gets heard in a field often filled with those who have neither achieved financial independence nor been able to come close to just matching the market return, yet are happy to tell you what to do with your money all the same.
Because Collins is in the phase of his life where he is beginning to rely on his investments to provide all of his spending money, he also has some great thoughts on the 4% rule about withdrawing money from your accounts. Like any great writer with experience, he goes to the source of the 4% rule: the Trinity study that first showed the likely success of various withdrawal strategies over different payout periods, both with an inflation adjustment and without one, for portfolios composed of 100% stocks to 100% bonds. The study was based on the recorded history of the stock market at the time (1998), and was updated again in 2009.
But unlike many writers, Collins urges his readers to examine the actual results of that study for themselves to see the sliding scale of risk involved as the withdrawal rate goes up and down. He reproduces the results in easy to read tables:
By so doing, Collins successfully demonstrates that the “4% rule” is really more of a 4% guideline depending on your personal appetite for risk. But he also points out that this guideline comes with a big caveat: the results of the study only apply assuming the market rate of return each year. And the only way to get that market rate of return? Low-cost index funds for the total stock market or the total bond market. Otherwise, you may as well throw the Trinity study and the 4% rule out the window for your personal situation. It doesn’t apply.
Collins also walks readers through the steps necessary for withdrawing money from the various types of retirement accounts, and his strategy for when and how to do so. He deftly confronts the difficult subjects of social security income planning (although he never counted on having it!), and how to negotiate required minimum distributions. He also discusses an easy way to start a charitable foundation with as little as $25,000, allowing you to create further tax efficiency for all the money you are likely to have if you follow the advice he gives.
Following the guidelines in The Simple Path to Wealth offers the easiest path to wealth for an individual investor I have ever read, and can provide much needed confidence for weathering various financial storms and relying on your nest egg through retirement. Although I was already invested in low cost index funds, after reading his book I further simplified to just the two funds Collins suggests, using my 401(k)’s equivalents of VTSAX (90%) and VBTLX (10%). So I’ve put my money where my mouth is on this one. And I’ve never felt better about my investment choices.
Collins thinks everyone with a decent income could retire a millionaire by following these principles. Absent extremely bad fortune, I believe he can credibly make that claim. And Jack Bogle and Warren Buffett have both endorsed the methodology that Collins so eloquently espouses.
Buy this book. Heck, let me buy it for you. Share this post and leave a comment below, and I’ll give away a copy to one lucky reader at the end of the month. We’ve got to spread the word about this incredible book.