What's The Simple Path To Wealth?

I like to read. My public library had quite the wait list for JL Collins' "The Simple Path To Wealth" but I jumped in it years ago because the book was so vehemently recommended in financial groups I'm in. If you also like to read, pick it up. It's calm, reassuring, and the advice is very popular.

But while you're waiting on your library hold, here were my takeaways.

1) Spend less than you make. This book doesn't dwell for chapters and chapters on the IDEA that you should budget and plan to invest. It just states the obvious, then moves on to the next instruction, which is my favorite thing about it. It is not for people who are soaked in debt and can't resist the mall... it assumes that you are past that.

2) Invest in low cost whole market index funds. These haven't always been available. If you wanted to invest in the 70s or 80s, you probably had to pay someone who was good at stock picking, or learn to pick stocks yourself, and hope the companies you picked succeeded. But starting in the early 90s, analysts started realizing that very few people could beat "the market". The economy is so random, you might as well just get a dart board to pick your stocks. That's really what an index fund is... a thousand tiny darts thrown at the whole market.

They're so popular that every brokerage firm has one. Collins' favorite is VTSAX, which you'd invest in if you set up an account at Vanguard. At Fidelity, you'd use FZROX. At Schwab you'd use SWTSX. 

If you invest $1 in one of these symbols, that $1 gets split up into thousands of pieces and you own a fraction of thousands of companies. If a company doubles or quadruples in value, that fraction quadruples for you. If it goes bankrupt, you lose that fraction. 

Historically though, more companies double in value than go bankrupt, and a company can't go MORE than bankrupt, if that makes sense. It can't erase a double return. The stock market certainly has its ups and downs, but over a long period, it tends to go up, especially periods like 10 or 20 years.

3) The stock market will go down. This book makes a huge deal about the fact that the stock market can go down. Collins even has a guided meditation for it on his Youtube. You can pull up any of these symbols on a historical chart and see that it goes up and down. There is always someone on the news telling us that a stock market crash is right around the corner. This is because there's not a lot else to talk about on the news, honestly. Every day it goes up or down and we don't know why, it's pretty irrational. But we know that the world is working to make it go up, and historically, eventually, it always goes up.

Whenever it goes down, there are posts in the finance communities I'm in by new investors who are very worried that they've done something wrong. They'll say, "I read this book, I invested $1000 hard-earned dollars in VTSAX, and now it's only $900! Did I pick the wrong time? Did I pick the wrong fund? Should I pull out of my investments now to avoid losing any more money?" We tell them to zoom out at the chart, understand the history, take a deep breath and call us next month. They never come back to say thank you, oddly enough. 

Some people reply "be happy, your shares have gone on sale! buy more!" That's okay too. You could invest $900 and buy the same number of shares you got for $1000 last month. I don't really care. I try to invest the same amount every month and not think about it, because thinking about the little weeks and months going ups and downs will drive you crazy. I'm not investing for next month, I'm investing for years down the road.

4) Diversification A whole market index fund with thousands of companies is pretty diverse. That said, you might eventually want to invest in real estate, bonds, international funds... the book touches on bonds more than other ideas but when you're just getting started, keep it simple. Don't worry about all this, especially if you're in your first little year of investing. 

5) Financial planners Financial planners will take 1% of your portfolio every year, which really adds up, to invest for you, and after reading this book you'll wonder why they're worth it. 

6) Expense Ratios Some of these index funds also take a % of your portfolio every year. FZROX doesn't for now. An index fund that takes 1/2-1% is actually pretty expensive. That's why we use the term "low cost index funds" to talk about our favorites. That cut they take is called an expense ratio.

7) Scams The book has a fun chapter about scams where an investor will send out 100 letters recommending various stocks. Then more letters the next week to people who managed to get letters about a stock that went up. Lather, rinse, repeat until a few letter-receivers have had 3 weeks in a row of letters from someone who seems to always pick winning, increasing stocks, they think the person is brilliant and they invest all their money with them. This probably isn't the most important chapter but I thought it was a nifty story.

That's what I got from the book. I thought it was nice, I recommend it often, I see it recommended a lot. I hope you enjoy the ideas too. It's definitely reassuring to hear from someone who's not trying to sell us anything, just making logical points about the market, backing it up with data.