Book Review: The Simple Path to Wealth

The Simple Path to Wealth, by J.L. Collins

Overview

The Simple Path to Wealth by J.L. Collins is considered by many to be the primary textbook of those seeking financial independence.  As a result, Jim (I’m going to refer to him as Jim since I’ve listened to the audiobook he narrates so many times, I feel like I know him) has become one of the key figures in the FI community.  He regularly appears on podcasts, in conferences, and is in the recently released FI documentary Playing with FIRE.  The book was born out of a series of 35 blog posts on Jim’s blog called the Stock Series, found at jlcollinsnh.com, where he outlines his philosophy.  Interestingly, these blog posts actually grew from a collection of letters he wrote to his daughter to teach her about personal finance and investing.  

The book starts by telling about his own journey.  He teaches three basic behaviors that helped him ultimately achieve financial independence: a high savings rate of 50% or more, avoiding debt at all costs, and investing in index funds.  He started by saving enough to have what he calls F-You Money (you can probably figure out what that stands for on your own), a term he didn’t come up with, but a concept he strongly endorses. Basically, F-You money prevents you from having to do things you don’t want to do.  If you no longer like your job, or you are being forced to take on responsibilities you don’t want, having enough saved to cover your expenses for an extended period of time gives you the power and freedom to quit and move onto something you actually do enjoy.  Thus, the term F-You money.

Like many personal finance books, Jim spends some time addressing the shackles of debt.  One facet of debt he discusses that I particularly find interesting is student loan debt.  He asks why there has been such a dramatic rise in the cost of post-secondary education.  From 1975 to 2014, inflation as measured by the Consumer Price Index, has caused an approximately six fold increase in the cost of average goods.  During the same time period, the average college tuition at a state school shows a 33 fold increase.  Go figure.  He calls out our student loan system as a modern day form of indentured servitude, forcing 17 and 18 year olds with very little financial understanding to take on huge loans that can burden them for many years, if not the rest of their lives.  

After discussing debt, Jim teaches about basic investing concepts such as opportunity cost and compound interest.  He then does the best job I have ever seen anyone do in teaching what a stock is and how the stock market works.  He explains how stocks are a hedge against inflation in the economy.  Similarly, he explains how bonds work and how they act as a hedge against deflation in the economy.  

After laying this foundation of understanding, Jim starts to explain what he is best known for: passive index fund investing.  He argues that the stock market is the most powerful wealth building tool of all time.  He regularly refers to the 40 year period from 1975 to 2015, where the stock market returned an average of 11.9% per year (this is with dividends reinvested and not accounting for inflation).  He admits it is a rocky ride with significant ups and downs, but that is the nature of the beast.  But even with all of this volatility, this number of 11.9% is, in his words, breathtaking.  

Next, Jim explains that no matter how good you are, or think you are, no one can consistently beat and time the market. No one can consistently pick winning stocks. So why try? Rather than trying to beat the market and lose money, the goal should be to get the market return, which again is breathtaking when investing for the long term. This can be accomplished through index fund investing which is simpler, cheaper, and more profitable. He explains what index funds are, how they work, and why they should be the workhorse of your portfolio. Jim is a strong proponent of Vanguard and their low cost passive index funds. Specifically, he recommends VTSAX which is a U.S. total stock market passive index fund. When you own a share of VTSAX, you essentially own a small piece of every publicly traded company in the United States.

Jim describes two phases on the path to financial independence: the wealth accumulation phase and the wealth preservation phase.  During the wealth accumulation phase you are trying to build enough wealth such that your assets produce enough passive income to cover your expenses.  In this phase, especially for those with a long time horizon, he recommends an aggressive portfolio consisting of 100% stocks through VTSAX.  The caveat is that you have to avoid panic and weather the financial storms that will surely come during your investing lifetime.  

In the wealth preservation phase, after you have reached financial independence, you no longer need to be as aggressive, so he recommends introducing bonds into the mix, which “smooth the ride” and provide some regular interest income.  He recommends adding VBTLX, the Vanguard total bond market index fund, to your portfolio.  He recommends you still remain primarily invested in VTSAX, but to keep 20-25% in VBTLX and a small amount in cash.  He teaches which accounts to invest in to minimize fees and taxes, as well as strategies to withdraw the money during retirement.  

Do you need a financial advisor to do all of this?  Jim would argue that you do not, since after all, this is the simple path to wealth.  He discusses the financial services industry with all of its conflicts of interest and associated fees that kill your investment returns over time.  He argues that once you know enough to actually pick a good financial advisor, you know enough to do all of this yourself.  

Things I like

The best part of this book is found within the title, The Simple Path to Wealth.  Building wealth need not be complicated and anyone can learn how to do it.  And there are few better teachers I have found than Jim Collins.  He explains things in a way that nearly anyone can understand, even without any previous personal finance or investing knowledge or experience.  

Through the course of the book, Jim shares many of his pearls of wisdom that I absolutely love.  I have made a list here of some of my favorites:

• Spend less than you earn, invest the surplus, avoid debt.  Do this and you’ll wind up rich. 
• Money can buy many things, nothing more valuable than your freedom.
• You own the things you own, and they in turn own you.
• Those who live paycheck to paycheck are slaves.  Those who carry debt are slaves with even stouter shackles.  Don’t think for a moment that their masters aren’t aware of it.
• Complex investments exist only to profit those who create and sell them.
• Financial advisors are expensive at best, and will rob you at worst. 
• By the time you know enough to choose a good investment advisor, you know enough to handle your finances yourself.

Things I Don’t Like As Much

I really love this book and all that it teaches, so it is difficult to find things I don’t like.  But if I was forced to be picky, here are a couple of points where my opinion differs.  

While the strength of the book is its simplicity, the more I have learned about personal finance the more I think it is a little oversimplified, at least for me.  I don’t disagree with the index fund investing approach, in fact this is the primary strategy I employ in my own stock and bond investments.  It just makes me a little nervous being 100% invested in the paper asset class alone.  Given the volatility of the market, especially after 2008-9, I prefer more diversification by investing in both the real estate and small business asset classes. 

Another criticism Mr. Collins receives is that his approach to investing does not include an international stock index fund.  He argues that broad based US stock index funds, like VTSAX or an S&P 500 index fund, contain the largest U.S. companies.  These companies have international operations, thus giving you the exposure to foreign markets.  Furthermore, given the increasing interdependence of the global economy, there is an increasingly strong correlation between the U.S. and foreign markets decreasing any diversification benefit you might have hoped for should the U.S. market decline.  Despite this logic, I am more of a proponent of the Bogleheads’ Three Fund Portfolio, which consists of a US total stock market index fund, a total international stock market index fund, and a U.S. total bond market index fund.  Stating all the reasons here is beyond the scope of this post, but I plan to write a review of this book as well in the future.

Who Would I Recommend This For?

This book is excellent for everyone.  In fact, this is the first book I recommend people read when they show interest in pursuing financial independence.  If you haven’t read it yet, stop wasting time and get started on it today.  I personally like the Audible version since Jim narrates it himself and has an awesome voice, but if you prefer the printed word, that works as well.