I’ve been following Jim Collins, who blogs at www.jlcollinsnh.com, for about two years now. His simple, direct, and low impact investing style has changed how I invest. Investing before was exciting and time-consuming- watching the news, reading stock charts and pouring over technical analysis. Now, investing is boring. But I’m finally seeing returns.
Mr. Collins turned the advice in his lauded “Stock Series” into this book. It contains advice he would give to his children who are just starting out and to his friends who are nearing full retirement. All of the advice is easily understandable by the most novice investor.
Mr. Collins also offers some excellent advice for service members, something not often found in investment books.
Simple & FIRE
The great thing about the FIRE lifestyle is that its all about freedom. Freedom is time to spend doing what you wish, not working an ever greater percentage of our 24 hours to earn an extra dime. Jim’s guidance is simple- it takes the time out of investing and frees you up for other pursuits.
Mr. Collins is a proponent of low fee index fund investing, in the style of Jack Bogle.
Like Mr. Bogle, the founder of Vanguard and the first index funds, Mr. Collins recognizes the deeply corrosive nature of investment fees. His advice is to steer clear of high fee investments and the brokers and advisors who peddle them. Fees and their true cost have been covered HERE.
Jim is a fierce proponent of Vanguard, as the reader will find from his fund recommendations. Vanguard does have some of the lowest fees around, for civilians, but not always for the military.
The following is a Chapter by Chapter review, skipping some of the introductory and expository sections.
Its never been about retirement
Jim explains his wayward start to investing, and how he learned about F-You money. Jim has never been a retire early type of guy, but he learned the power of having enough money invested (FI) to make not working a choice, rather than an emergency.
At a young age, after saving $5000, he quit his job when a boss wouldn’t give him four months off to tour Europe. The same boss convinced him to stay on the job rather than quit, gave him a raise and gave him the time off. Jim learned that having money allowed him to dictate terms to the boss. A person with a job and in debt is a “gilded slave” he realized. Later, he watched his net worth grow even when he was out of a job and taking care of his children- again proving his theory. Money allowed him to tell the world “F-You!”
Debt, the unacceptable burden
Jim is a hard numbers man. Like me, he advocates rejecting the debt snowball and hitting your debt where it counts- at its highest interest rate. As a lifestyle, Mr. Collins soundly rejects debt. Debt is the antithesis of F-You money. It drains your ability to invest and shackles you to your job with a golden chain. However, as a firm believer in the power of long-term compounding investing, he advocates a system of investing alongside debt pay-down.
Interest rate 3%: pay off slowly, invest the rest
Interest rate 3-5%: invest or pay off debt as you feel comfortable
Interest rate >5%- Pay off debt ASAP (pp. 21)
Can Everyone Retie a Millionaire? & How to think about Money
Jim lays out his lifestyle and financial independence advice, best summed up as
“spend less than you earn – invest the rest – avoid debt”
How to invest in a raging Bull (or Bear) Market
Mr. Collins in a market optimist and history is on his side. As a long haul investor, he is had seen the big drops and the big gains. He has sold low and bought high. He experienced the shake-ups of the 80, the 90s, and ’08. But, when we look at a stock chart going back over 100 years, these seemingly devastating drops are hard to pick out. One thing is clear- the market always rises.
Quick- Show me the DotCom bubble?
At the time of this post, the Dow and the Nasdaq have just hit record highs- 20,000 for the Dow, 5660 Nasdaq. We are in the Raging Bull! I’m glad I’ve been following Jim’s advice. I appreciate the addition to my net worth, and I’m investing every month. The next big drop? Sign me up, I’m excited because we’ll be getting more shares for our dollar.
There is a Major Market Crash Coming!!!
Fear is what hurts the average investor- fear that there is a big crash coming, fear that they will invest just before the crash and lose all their money. After the crash, fear keeps the investor out of the market as it rebuilds, thereby losing out on gains. Jim won’t lie- there is a major crash coming. His advice”
“Toughen up cupcake, and cure your bad behavior”
I was afraid once. After losing a bunch of money trying to time the market with cash I needed to use elsewhere, I swore off investing altogether and I even significantly curtailed my TSP contributions. Fear is the little mind killer. Not anymore!
The Market always goes up
In this chapter, Jim offers two notes on the market. Having proven that the market always goes up, he adds the following encouragement for the stock investor.
- The stock market is self-cleansing: Owning a stock is like owning a very small percentage of one of the 3,700 companies in the US. Owning a share of a Stock Index fund (an index fund is a basket of stocks which closely matches the performance of a segment, or even the entire, market) is like owning an even smaller slice of every company in the country.
- A stock held in an index fund could lose 100% of its value is the company goes bankrupt, but since you only own a small slice of that stock, its overall effect on the fund is not great. How large can the company grow – 100%, 1,000%, even 10,000%? The upside potential is unlimited, and since you own all the stocks, you get a piece of that action. No more feeling of regret at missing the next Google, Amazon, or Apple.
Why most people lose money in the Market
Jim offers four reasons why, in his experience, people lose money in the market.
- We think we can time the market: only Miss Cleo knows the future
- We believe we can pick individual stocks: only Warren Buffet can do that.
- We believe we can pick winning Mutual Fund Managers: Jim points out there are over 4,300 Mutual funds, but only 3,700 stocks. New ones are constantly being born to bury the ones that failed. Statistically, a really good mutual fund manager can beat the market only 18% of the time over 15 years. Over 30 years that number drops to 0.6%. Still, “100 percent of them charged their clients high fees to try.”
- We focus on the foam: Treat the market like a beer: you get the liquid and the foam. Losing investors focus on the big news, the talking heads, and the headlines- the foam. Winners sip past the foam, ignoring it for the beer.
Keeping it Simple:
I like the three considerations Jim gives us to evaluate where in our investment lifecycle we are
- In what phase of your investing life are you? The Wealth Accumulation Stage, or the Wealth Preservation Stage. Or perhaps a blend of both?
- What level of risk do you find acceptable”?
- Is your investment horizon long term or short term (pp. 86)
After cautioning us to not link our age to a phase, that no investment is risk-free, and that we are almost all probably long-term investors, Jim gives us our three (Simple) tools for Wealth:
- A Total Stock Market Index Fund (Vanguards interations of this funds are VTSAX, VTI, etc.) “Core Wealth Building Tool. ”
- A Total Bond Market Index Fund (VBTLX) Bonds offer less reward for less risk, and tend to smooth out the ride.
- Cash. Got to have cash. Jim keeps his in the bank, not under a mattress.
And that’s it. The entirety if his investment advice can be summed up by buying VTSAX during your wealth building phase, adding more VBLTX to smooth the rise as you approach retirement, eventually reaching about a 75/25/5 allocation.
Uncle Jim says: “Put all your eggs in one basket, and forget about it.”
Notably, Jim’s ‘Wealth Preservation portfolio’ is significantly more aggressive than traditional advice, which would be a 50/50 stocks bond allocation. While Jim goes into depth on how bonds work, he rejects their ability to really preserve wealth. At best they are a hedge against deflation and can smooth out the ride if your stock portfolio takes a big hit. Over the long term he argues, stocks are the only way to protect against inflation and die with money in the bank.
My Personal Capital Robo-advisor keeps telling me I’m underweight in International stocks. What would Jim say?
Jim writes convincingly that International funds add unnecessary political and currency risk along with adding fees, as International funds are usually more expensive. Additionally, since many US companies have stakes in many countries, by owning US funds you are likely sufficiently exposed to the international market.
Target Retirement Funds
For those who want it even simpler, Jim recommends a TRF. Service members will recognize these as the TSP’s L-Funds. These funds automatically balance your portfolio, providing a mix of Stocks, Bonds, and other investments. If you plan on retiring in 2050, pick the L-2040 fund. Plan on retiring in 2040 but have a greater risk tolerance? Pick the L-2050 fund.
Many people who work full time have access to a retirement plan. Jim’s take, which I particularly like, is how to approach the retirement plans available to you and your family in a tax efficient way. For example, Jim advocated contributing up to your company match in a 403b, paying attention to the tax treatment of your contributions, investing your company plan contribution in the lowest fee options available, and moving your 401K to a low-fee IRA (invested in Index Funds) when you leave your job.
Jim offers different, and important, advice for those eligible for the TSP. Because the TSP is strictly Index Fund investing with exceptionally low fees, it makes sense to leave your money in the TSP after you leave federal service, rather than roll that money over into an IRA.
IRA’s, Taxes, HSA’s
While Jim spends a few short chapters discussing the virtues of Health Savings Accounts and the various types of IRA’s, as well as some tax law, I anticipate these rules will change before I retire, and therefore may have little bearing on the younger readers of this blog in terms of FIRE. Its good info, and you should explore it for future referance as you progress through your investing stages.
The final part of Jim’s book offers some general wisdom on investing, ranging from a defense of index funds to why he doesn’t care for financial advisors. I found his chapter on the negatives of Dollar Cost Averaging the most helpful.
To Dollar Cost Average a sum of money, say $12,000, you would invest $1,000 a month each month, for a year. In this fashion, you avoid putting all your money in before a big drop, but still have some money in if the market swings up big time.
Jim soundly rejects this idea, and I do too. Those who dollar cost average (DCA) are attempting to rationalize an unknowable market future under a lens of fear. The Dollar Cost Averager fears a big drop and thinks she can time the market enough to avoid this possibility. But, as Jim points out numerous times, the market is far more likely to go up over the year (in which case you would lose the gains from not having invested your entire egg at the outset) than the market is to crash. Jim’s advice remains- invest as much as possible, as soon as possible, and let the magic of compounding interest and perpetually rising markets work in your favor.
The final chapter I thought worthwhile to review concerns the “Safe Withdrawal Rate.” Often cited as 4% by Early Retirement Enthusiast’s, Jim also uses the Trinity Study’s 4% as a benchmark safe withdrawal rate. The basic idea is that once someone has 25 times their annual spending saved, they may withdraw 4% annually with a 96% chance that their 50% Stocks, 50% Bonds portfolio outlasts them.
Jim is not a strict Early Retirement Guru, and his writing does caution that the 4% rule may be overly optimistic for those planning to spend more than 30 years in a retired status. Jim also demonstrates the negative power of fees on the Trinity stud’s assumptions. He recommends for those want to be absolutely sure they don’t outlive their money withdraw only 3%. He also provides a short discussion and the data to prove why the 50/50 portfolio is not the best over longer time frames, which backs us his personal recommendation on a 75/25 portfolio. See more proof here.
As a FIRE type family, this cautionary corollary to the Trinity Study has fundamentally changed our future plans, keeping me more heavily invested in stocks, and raising my target investment goal so that 3% withdrawal meets my expected monthly spending.
If you know some who is graduating this year, rip out pages 245-249 and staple them to their forehead. Its all Jim’s advice is one neat package.
Here’s an affiliate link to Jim’s Book.