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Practice English Speaking&Listening with: JL Collins: "The Simple Path to Wealth" | Talks at Google

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RACHEL SMITH: Please welcome J.L. Collins.


J.L. COLLINS: Thank you.

RACHEL SMITH: You're welcome.

So my first question for you, the title of your book

is "The Simple Path to Wealth."

J.L. COLLINS: It is.

RACHEL SMITH: And it's a roadmap to financial independence

and a rich, free life.

So what does wealth mean to you, and how

is it tied to a free life?

J.L. COLLINS: Well, I suppose we could look at that

in two different directions.

So if we think about the psychological part of it,

to me, personally, what wealth represents

is security and freedom.

So security to protect you from what the world can

throw at you, and freedom to chart your own path in a way

that you couldn't do without the resource.

On the financial point of view, I

suppose when I think about what the benchmarks are

for are you wealthy or not, have you achieved

financial independence or not, what

has come to be called the 4% rule is a good guideline.

That comes out of a thing called the Trinity study.

And without belaboring that point,

it simply suggests that if you have

enough assets that 4% of that amount

can cover your annual expenses, you

can consider yourself financially independent.

So you can work at it from two different directions.

You could say, well, I have a million dollars, so 4% of that

is $40,000.

Can I live on $40,000 a year or not?

And therein lies the answer to your question.

Or you can look at it from the other direction.

You can say, you know, I need $40,000 to live on.

So how much do I need to be financially independent?

You multiply $40,000 by, as it happens, 25,

you get a million dollars, and there's your answer.

So it really depends on what your needs are.

RACHEL SMITH: And why is it important to keep

the path simple?

I think there are a lot of folks tuning in

or folks in the audience who have read

financial independence books, and maybe their eyes

roll back in their head, because they just

can't make sense of it all.

So why is it important to keep it simple?

J.L. COLLINS: Well, that's one good reason.

But the reason that I prefer keeping it simple

is simple is simply more powerful.

Simple is what gets you the best results.

And in this case, when I talk about simplicity,

I'm talking about index funds and specifically broad-based

stock and then bond index funds when you bring them into it.

There are a lot of reasons that simplicity is an advantage.

It keeps your costs low.

It keeps your life simpler.

It makes things, when the time comes, easier on your heirs.

But the most important thing is it is the most powerful way

to reach financial independence.

People who come to my blog are always--

I get two kinds of readers of my blog.

People who are really into this stuff and they

always want to tinker, and that's not

who I'm really writing for.

I'm writing for people like my daughter

who knows that it's important, but she

has other things that she'd rather do with her life

than fixate on finances and investing.

And so when you have a simple path,

you can just get a couple of things right.

You'll have a very powerful performance.

You will outperform the vast majority of professionals

out there.

And I am fond of saying to those people who want to tinker,

if I thought there was a way to successfully tinker and do

better, then that's what I would have written the book about.

And in fact, I wasted a couple of decades trying to find that.

RACHEL SMITH: So you have a blog,

If folks are interested in your content,

should they begin with your blog or your book?

J.L. COLLINS: I would suggest that if you don't know anything

about me or this concept, I would go first to the blog.

And I would go to-- there's a button at the top called Stock

Series, and the blog is best known

for my stock series of posts.

And when you click on that button,

that will take you to an introduction.

And in that introduction is a link

to what I think is the best review of my stock series

that's been done--

and not best because it's most favorable,

but in my view most accurate.

So you can click over to that and read that brief review.

And after reading it, you'll know very clearly

whether this is going to resonate with you

or not and whether it's worth your time.

So I'd start there, and then I would

read a couple of the posts.

And then if you like what you read,

you can consider going on to the book.

There is nothing in the book that's not in the blog,

so you can get all the information

just by staying on the blog.

The book is more concise.

It's better organized, because the post and the blog

came organically as they occurred to me

or were suggested.

And the book has the advantage of being better organized.

It's more concise.

I spent more time polishing the writing so,

I hope that the writing is more polished.

But you'll make the judge of that.


And thinking back to the early days of your own investment

history, how did you learn all this stuff?

How did you learn to invest?

J.L. COLLINS: Well, I did it the hard way--

trial and error.

I spent, as I alluded to earlier, decades trying

to do things that were not--

what's seductive about this is that they were

subpar but not bad performance.

I tell people that long before I discovered

or embraced indexed investing, I'd

reach financial independence.

So I reached financial independence by picking stocks

and picking mutual fund managers-- active managers--

who could pick stocks or thought they could pick stocks.

So it can be done.

The problem with it is it's more expensive.

It's more time consuming.

It's not as effective as indexing.

So I would have been much better off if I'd

discovered indexing earlier.

The great irony is that Jack Bogle,

who is the founder of Vanguard and the inventor

of the first index fund available to the public,

launched that fund in 1975.

1975 was the first year I started investing.

I never heard of Jack Bogle or Vanguard or index funds

when I started.

It was 10 years before I heard of them,

and then it took me a disturbingly long time

to embrace it.

So people say, how do you know all this stuff?

I it's, well, because I made just

about-- if you can think of a mistake you

can make in investing, I've probably made it.

So to the extent that I know anything is from my mistakes.

RACHEL SMITH: So speaking of mistakes,

what do you think was working in your favor versus working

against you as you were trying to figure this out on your own?

J.L. COLLINS: Well, I think the main thing that was working

against me at the time and that is working against everybody

listening to this is there is a large industry--

Wall Street-- whose drumbeat is counter to our best interests.

And it is based on making this as complex as possible,

putting out a siren song that you, too,

can be Warren Buffett.

You, too, can pick stocks.

You, too, can outperform the indexes--

only if you're willing to pay us for the privilege.

And that's a very seductive message,

because everybody wants to think that they can be above average

and outperform.

RACHEL SMITH: You're in a room full of above average people.

J.L. COLLINS: Well, right.

But maybe not in investing.

Now, the irony is if you invest in index funds--

and, of course, the slam that active managers

put against index investing is that you will only

get average returns.

That's a little bit misleading, because yes, the index

gives you the return of the market overall.

But that return is far above average.

Index investing, based on the research that has been done,

outperforms-- depending on what numbers you look at--

80% to 85% of active managers over a 15 year period of time.

If you research out 30 years, the number

of active managers who can outperform the index

is less than 1%.

That's statistically zero.

So when you invest in the index and you're

getting the average performance of the market,

you're actually getting the best performance

that you can expect by a long shot.

RACHEL SMITH: And so what was working in your favor?

J.L. COLLINS: I think was working in my favor

is I continued being curious, and I

continued trying different things,

and I continued researching.

And indexing, which was first put in front of me

in 1985 by a good friend of mine--

there's something about it that is very counter-intuitive,

and I think particularly for smart people

like the people in this room and the people listening.

Because you look at it, and you say,

well, indexing says I buy every stock in the index.

And yet, if I can only just not buy the obvious dogs,

I'll outperform.

I mean, outperforming seems like it should be so simple.

But the problem with that--

or even if I just buy the top performers and not

even buy the mediocre or the low performing ones.

Obviously, I'm going to outperform.

And yet, you look at that research

that says that doesn't happen.

And of course, the reason it doesn't happen

is today's dogs are sometimes tomorrow's great turnaround

success stories.

And those that are flying high are the stories

of how they crash and burn.

So there is no way to know what is going

to happen with specific stocks, and it is just way too easy

to guess wrong.

RACHEL SMITH: So one thing that struck me

about your blog and your book is how specific the advice is.

So in other books or websites I've tried reading in the past,

the advice was always really vague,

like invest in mutual funds.

And it would leave me thinking, well, which one, and how much?

So why do you think other authors' advice is not

very specific?

J.L. COLLINS: Well, I'm not sure I can answer that,

because I can't put myself in the heads of other people.

Maybe I can answer it by telling you

why my advice is what it is, and that's

because I didn't write this blog to have

the international audience that I have today.

It never occurred to me that that would happen.

I had started actually writing a series of letters

to my daughter about financial things I wanted her to know.

And I shared it with a business colleague of mine,

and he said, you know, Jim, this kind of interesting stuff.

You might want to share it with your friends and family,

and a blog would be a good way to do that.

And this is in 2011.

I like the idea of a blog, because it occurred to me

that it would be a great way to archive the information.

But I didn't have a plan to create a blog as a business

or as a successful way to reach a broader audience.

It was just to archive the information

I wanted my daughter to know.

And that was basically what mistakes

I've made, what's worked, what's kicked me in the ass,

and what I think specifically she should do.

And so I think that's why my advice is so specific.

These are the things that I'm doing now.

These are things I wish I had done

in 1975, or at least in 1985, when I became aware

of indexing.

These are the things that I want her to do

and that I've got her started doing.

So that's maybe why my advice is more specific than others.


I can't tell you how many times I've

talked with a friend about how I'm on this new track

where I'm investing, and they say, well, what are you doing?

And I just send them one sentence

of exactly what I'm doing, and that's

what I read in your book.

And they're like, that's it?

And I'm like, that's it.

That's all I'm doing.

So aside from telling them to open their computer, start it

up, and what clicks to make to log into their account,

it's such simple advice.

J.L. COLLINS: You know, a year and a half,

two years ago, I was interviewed by Farnoosh Torabi

on her podcast.

And I don't know if anybody has listened to her podcast,

but at the end of her interview, she

likes to ask a question that says,

if you were suddenly given $100 million, what would you do?

And the typical kind of answers she gets

is, well, I'd buy this, that.

I'd give this money away.

I'd do that.

And of course, she's interviewing me.

We're talking about index fund investing, and specifically

VTSAX, which is Vanguard's total stock market index

fund and the one I recommend the most and love the best.

So when she got to that question,

she said, Jim, you've got $100 million, what would you do?

I'd put it in VTSAX.

And she goes, really?

That's what you'd do?

RACHEL SMITH: So one of my favorite posts on your blog

is called "Why your house is a terrible investment."

And I know you got a lot of feedback from your readers

about this.

J.L. COLLINS: Yeah, feedback's one way to say it.

RACHEL SMITH: So why do you think

this post is so controversial?

Why do your readers get so excited about this post?

J.L. COLLINS: You know, not me, but somebody said,

home ownership is the American religion.

And you could go to Dealey Plaza in downtown Chicago,

and you could set up your little soap box.

And you could climb up on it and pick any major religious leader

and begin to vilify that individual--

Jesus Christ, Muhammad, Buddha, who ever-- just vilify them

in the most horrific terms possible.

And people would just turn around and walk away.

They'd ignore you.

You get up on that same box and suggest

that home ownership isn't the perfect thing for everybody

to do, and they started gathering rocks.

So I think it's polarizing.

And the people who love their homes and

love the idea of owning a home--

that gets that response.

And then there's another segment of people

who don't like owning homes and see value in renting,

and they muster to the cause.

And that's what makes that post, to my surprise--

because I kind of did it tongue in cheek.

And by the way, I'm not anti-home ownership.

I've owned homes most of my life.

I am anti-believing the propaganda

that it is always or even commonly

a good financial decision.

It can be a great lifestyle decision,

and that's why I bought the houses I bought over the years.

But I never once bought them thinking

I was doing something that was financially astute.

Because unless you happen to get lucky with a rising market--

and that does happen--

it's generally not the best thing

you can do with your money if financial independence is

your goal.

RACHEL SMITH: And so for the person

who is at the point where they're considering

buying their first home or condo, what considerations

would you advise them to make before they do that?

J.L. COLLINS: Well, I think the first thing along the lines

with what I just said was to understand that you are not

making an investment, you're making a lifestyle decision.

In my manifesto on my blog, one of the things

that I say is something to the effect of all of our decisions

don't have to be driven by financial considerations.

But you should always understand the financial dynamic

of what you're choosing to do.

And I have a post about buy versus rent

and run the numbers, which talks you through how to do that.

So I would suggest, if you're renting now

and you're thinking of going into a house or a condo,

that you first run the numbers and find out exactly what it's

going to mean financially.

And it might be that it's going to be less expensive than what

you're renting.

That's possible.

That does happen.

More commonly, you're going to find

that it's going to be more expensive, but then you know.

And just because it's more expensive

doesn't mean that you don't have to buy the house.

It just means that you understand

what you're paying for the lifestyle decision

that you're making.

RACHEL SMITH: And that was one of the first conversations

we had at the Chautauqua.

I wanted to tell you a story about how I frequently

get asked, Rach, are you going to buy a place in Chicago?

And I say, well, I read J.L. Collins' book,

and I'm cool renting for now.

I told you a story about how my refrigerator broke right

before I came to Ecuador, and just called my landlord

and said, I need a new fridge.

See you later.

I'm going to go out of town.

So other than this post called "W

your house is a terrible investment,"

is there any other post on your blog

that's generated a lot of feedback or controversy

from your readers?

J.L. COLLINS: Well, that's the one that's

generated the most controversy, because it's such a hot button


Less controversial but very popular--

probably the two that are most popular

is "How I failed my daughter" and "The simple path

to wealth," and that was one of my earliest posts.

And in that one post, I kind of sum up

the whole content of the blog in the book, so that's popular.

"Why you need F-you money" is probably at least as popular.

From the reaction of the audience,

I gather we have people who agree with that.

RACHEL SMITH: There's a famous video

on YouTube called "The importance of F-you money."

So those of you who haven't seen it, write it down.

Put your headphones on at your desk.

J.L. COLLINS: Yeah, it's not suitable for work.

So just a quick aside on that, if I may.

There's a movie called "The Gambler," which

is not a particularly good movie,

so I'm not recommending the movie.

But there is a wonderful segment.

It stars John Goodman, who's a wonderful actor.

And there's a wonderful segment little piece in that movie--

and you can Google that and find this clip--

where John Goodman is talking to Mark Wahlberg

about the importance of having F-you money.

And when I saw that clip, I thought,

I want to do a version of that.

I want to keep it as close to the original

as I can, but tweak it so it reflects my values.

He talks about buying a house, for instance,

and we've talked about that.

But my problem is, I didn't know anybody

who could make the film.

But one of the wonderful things about Chautauqua,

which is where you and I met, is that you

meet really cool, interesting people who

come to Chautauqua, including a couple of years ago a pair

of filmmakers who were less than an hour

from where we living at the time.

And they came up-- and I give you all this background,

because if you choose to watch this,

it's filled with salty language that I don't use every day.

I'm acting.

I'm trying to channel John Goodman,

and he uses the same language.

And if you like it, you think I do a good job in it,

the credit goes to my filmmakers, Joan and--

terrible, I'm drawing a blank on his name.

But if you go to my blog and you do the search function,

you'll find it, and you'll see the credit is given.

RACHEL SMITH: So we're in the beginning of 2018,

and this is a good time for folks

who are trying to get their financial house in order

to maybe come up with a 2018 plan--

2018 and beyond.

And the amount of investment options

is confusing and overwhelming.

So I know a lot of folks who are maxing out their 401(k),

because that's very sound advice.

We get the full match.

They might also have an emergency savings fund.

But beyond those two things, they

don't know what to do with what's left over.

And they're just keeping their money in savings or checking,

or maybe they're outsourcing the management of their money

to someone else.

So for the folks who don't feel confident

investing beyond just the 401(k) match and they're

just keeping their money maybe in savings or checking,

how should they begin to make sense

of all these different options?

How would you advise them to get started?

J.L. COLLINS: Well, in a way, this

circles back to the advantage of things being simple.

So if you have a visual image, let's say, of a long banquet

table that is just groaning under the weight of every kind

of food and preparation and dish you can possibly imagine.

Think of that image as what the financial community

has laid out for us and that they want us to partake in.

The problem is these are all very expensive things that

are, for the most part, designed for the people

who have created them and who sell them to enrich them,

not necessarily what's best for us.

That's the bad news.

The good news is you can put your arm down

on that table at one end except for a tiny little corner

and sweep it all under the floor,

because none of that matters.

Only a very small sliver of what's out there really

matters for us in building our wealth.

That's index funds, and that's very specifically

broad-based stock index funds and broad-based bond index


I mentioned the one that I like the best is

VTSAX, which is Vanguard's total stock market index fund.

More common-- and the original fund Jack Bogle created--

is the S&P 500 index fund.

That's perfectly acceptable, and the two are surprisingly close.

So sometimes people get hung up on deciding between them.

If you have access to one and not the other,

go for whichever one you have.

And then there are total bond market funds.

With those two tools, that's all you really need.

It gets a little complex with 401(k) plans and 403(b) plans

for people who are not in the private sector,

because they don't always offer those particular Vanguard

funds that I prefer.

Most plans offer some kind of broad-based stock

index, usually an equivalent of an S&P 500.

It might not come from Vanguard, which is my preferred company,

but an S&P 500 index fund is pretty much the same

no matter who's providing it.

Fidelity or T. Rowe Price-- those are all fine options.


And so if someone wanted to get started this year

and they wanted to take a look at some index funds,

but they also know that there are HSAs,

529 plans, how would you recommend they get started?

Maybe if 2018 was just going to be a simple year,

what would your advice be if they're

feeling overwhelmed by all the different places they

could put their money?

J.L. COLLINS: Well, I think if you're really

starting from ground zero and you really

do not have any base of knowledge on this--

and that's not a bad thing.

That can be an advantage, because at least it means

you don't have bad knowledge.

And there's a lot of bad information out there.

So if you're at that ground zero level, don't feel bad about it.

That's an advantage.

There's nothing you have to unlearn.

At the risk of touting my own book and my own blog,

I would go there and do a little bit of reading

and do a little bit of learning.

So one thing in the way you phrased

the question that people need to be clear about--

and this is something that I come across a lot.

They'll say, well, I want to invest in my 401(k),

or I want to invest in my IRA, or I want to invest in VTSAX.

Well, you're conflating investments

with what I come to call buckets.

So a 401(k) is not an investment.

An IRA is not an investment.

A TSP plan is not an investment.

Those are buckets.

In those buckets, you hold your investments.

Investments are things like mutual funds and stocks

and bonds.

So those are the investments that you

choose to put in your bucket.

So if you have a 401(k), as you do at Google--

and I have no idea what your 401(k) looks like,

but you will have a list of selections of investments you

can put in that 401(k) bucket.

If my approach resonates with you,

and you believe in broad-based index funds are something

you want to go with, you can go down that list

and maybe find the specific funds I'm talking about.

But you will certainly probably find

something that is a broad-based index fund.

The easiest way to do that, by the way,

is to find the column that shows the expense ratio.

And you should have that.

You run your finger down that, and when

you find the very lowest expense ratios,

you will have found the index funds.

And focus on those, and take a look at them.

RACHEL SMITH: And why do you think some people choose

to manage their own investments, whereas others outsource it

to someone else?

J.L. COLLINS: Well, I think the people who outsource it

to someone else have been convinced

that this is just too complex for their pretty little head.

And the vast majority of things on that banquet table

we talked about are too complex for anybody's pretty little


In 2007, 2008, 2009 when the economy cratered,

Wall Street was selling products they didn't understand.

So if this stuff looks complex to you,

it's because this stuff is complex, and in some cases,

intentionally complex.

But we don't care about that, because we

don't need any of that.

And once you understand that you don't need that complex stuff,

then doing it yourself becomes much more attainable,

even if you don't have any interest in financial stuff

like, frankly, my daughter.

She has better things to do with her life than fool

around with this financial stuff that intrigues her dad,

and that's great.

People have bridges to build and ways to make the world work.

The beauty of this is that if you get a couple of things

right financially, you can profoundly

change your financial life without having to dwell on it.

And you can get on with doing things

that are more important to you and maybe

more important to the world.

RACHEL SMITH: And what do you think are two to three

of the biggest mistakes people can make when investing

or managing their money?

J.L. COLLINS: Well, I think two come to mind immediately.

One is thinking that you can pick individual stocks,

and by extension, that you can pick people

who can pick individual stocks-- that is,

people who run actively managed mutual funds.

One of the comments that makes my skin crawl is when

I hear people say something like,

well, Warren Buffett became a billionaire

picking individual stocks.

I'll just do what Warren did.

As if.

As if.

There is a reason that Warren Buffett is famous,

because Warren Buffett has managed

to do something that is extraordinarily

difficult to do.

The ability to do it is extraordinarily rare.

And the hubris to think, oh, I'll just go and do what Warren

has done is, to me, stunning.

It's just absolutely stunning.

And the research indicates that while Warren has done it,

as we talked about, you go out 30 years, and less than 1%

of people trying to do it who have survived

that long have accomplished it.

And I bring this one up first, because this

was my own stumbling block.

I just kept believing that I could

pick people who could pick stocks,

and I believed that I could pick stocks.

And because every now and again I'd get it right,

and maybe I got it right more often than I got it wrong,

that feeds into that belief.

And that's the thing that made me

reluctant to pick up indexing.

But the truth is that the few times I got it wrong

dragged down my performance--

and this is what happens to the vast majority of people

trying to do it--

to where I would have been far better off with the index--

far better off.

So trying to pick individual stocks and managers is

number one, maybe--

not necessarily in order.

The second thing is trying to time the market.

And you can't turn on the financial news

or open up a financial periodical

without finding somebody who's telling you definitively

where the stock market is going next.

Nobody knows.

If you could accurately do that with any consistency,

you'd be far richer than Warren Buffett and far more lionized.

It would be magic dust.

Nobody can tell you where the market is going.

You just can't predict the market, and trying to

is a fool's game.

So Fidelity Investments did a little piece of research

I think about a year ago, a year and a half ago,

and they were curious as to what group of investors

in their funds did best.

Because the research indicates that the people

who invest in a mutual fund under-perform

the performance of that fund.

He said, well, how is that possible?

If they're investing in the fund,

their performance should match the fund.

The reason they under-perform is they try to dance in and out.

They tried to time the market.

So when Fidelity did this research,

they determined that one group of investors

did significantly better than any other group who

own their funds--

and that was dead people.

The dead people outperformed.

Now, can you guess why?

Because they didn't tinker with their investment.

The second best performing group were

people who forgot that they owned the fund.

So you can't time the market, and especially

when the market has been on as long a bull run as it has.

The media is filled with people telling you

that they know what it's going to do next.

At some point, the market will dive,

because the market is volatile.

That's what markets do.

So if you invest in the market, you have to expect that.

You have to expect the volatility.

You have to be willing to ride with it.

But I don't know when it's going to do that.

It could be happening as we're sitting in this room together


I haven't looked at the market.

It might be 10 years from now.

I have no idea, and nobody else knows.

The difference is I'm willing to say I don't know.

RACHEL SMITH: So for someone who may

be interested in investing-- maybe when they go home today.

They have some cash they want to start investing.

And they say, well, the market's the highest it's ever been.

I'm going to wait for it to dip.

What advice would you give to those folks who

are waiting for the next step?

J.L. COLLINS: If we went back to March of 2009,

which was when the market bottomed and its collapse.

Almost every month since then, you

could have said the same thing.

I wrote a post in, I want to say,

2014 responding to a reader who was asking

that exact same question.

The S&P 500 was 1,600 and change,

and this reader was saying, how can I possibly reinvest?

How can I possibly invest?

Nothing would go up for the last five years.

And here it is at 1,600, and it bottomed out

at I want to say 600 and something.

And where are we today?

Now, I didn't know that at the time,

because I didn't know where the market was going to go.

But you just don't know.

You can't predict the market.

And by the way, it's become fashionable to suggest

the P/E ratios or Shiller P/E ratios give

some insight into this.

In that post-- it's called "Investing in a raging bull,"

it's in the stock series--

I just put a link to a post I came across--

very well done-- where the guy analyzes

where the various P/E ratios were at the beginning of drops.

And there's no predictive correlation there to be had,

so you just can't know.

I also have a post called "Why I don't like dollar cost


And in summary, dollar cost averaging

is the idea of putting in a little bit of money

at a time over a period of time.

The problem with that is that unless the market conveniently

goes down while you're doing it, you

will have been giving up gains rather than avoiding losses.

And the thing that really bothers me

about it is that at the end of your investment period

where you have finally deployed all of your money, who's

to say the next day isn't the day

the market takes its big plunge?

So you have $120,000, you want to deploy.

and you say, I'm going to do it over the next 12 months.

And I'm going to put $10,000 a month in,

and I'm going to avoid that risk.

You're not avoiding the risk, you're

just delaying the risk until you put that final $10,000 in.

Now, if you get lucky and the market plunges,

you'll pat yourself on the back.

But understand that's only luck, because nobody knows

where the market is going.

There's a saying that the best time to have invested

was yesterday, and the second best time is today.

RACHEL SMITH: That's great advice

J.L. COLLINS: Time in the market is more powerful

than to time the market.

RACHEL SMITH: Time in the market is

more powerful than trying to time the market.

J.L. COLLINS: Well said.

RACHEL SMITH: I like that.

So we have one more question for Jim,

but for folks who have live questions,

feel free to line up at the mic.

We also have a Dory at go slash Jim dash Dory.

So my last question before we turn it over to live questions

is, there may be folks in this room who

have a New Year's resolution to get

their financial house in order.

And they may be one of the folks who

have a lot of cash in checking or savings,

or they just are so overwhelmed by this stuff

that they don't even know where to begin.

So what would you say are just the key takeaways

they should focus on when they leave this room?

J.L. COLLINS: Well, again, I would encourage anybody

in that position-- if you're sitting on that much cash,

and assuming that that amount of cash

represents a large part of your net worth,

because money is relative.

But if you're sitting on $100,000 as an example,

and that is a large part of your net worth,

that indicates that you're not comfortable investing.

And that's fine.

So the first thing you should do is educate yourself,

and you can start with my blog or my book.

And see if that resonates, and go from there.

If you find it doesn't resonate, then there

are a lot of other sources out there,

but educate yourself first.

And some of the posts that I referenced

are in the stock series.

You can read about investing in a raging bull.

You can read about dollar cost averaging.

But once you decide to invest in stocks,

you have to accept the fact that the market is volatile.

At some point, the market will go down.

Now, whether it goes down 10% and continues

going up 20%, who knows.

Nobody knows.

But the market-- you can count on it being volatile.

And at some point, it will go down,

and you have to come to terms with that.

And you have to be absolutely sure that when that happens--

not if, but when--

you don't panic.

Because the only way you lose is if you

panic and sell at the bottom.

Now, trust me when I tell you, because I've

lived through a few of them.

When the market is taking one of its dives, it's ugly.

It's painful.

It's scary.

It's easy to sit here now and say, well, I'll

stay the course.

But it's not so easy to do it when it's happening.

So the first thing you need to resolve

it seems to me in your own mind, in your own heart,

in your own gut, is that when that happens,

that selling is not an option.

It's just simply not an option.

Now, in my world, I divide the times

in our life between wealth accumulation and wealth

preservation stages.

In a more traditional point in time,

that might have been when you're young and you're working,

that's your wealth building stage.

And then you get to 60 or 65, and you

retire, wealth preservation.

These days, people step in and out

of careers on a routine basis, so you

will go from wealth preservation to wealth building

and back several times.

I know I did in my career.

When you're doing that, there are two ways

you can mitigate the volatility of the market

and actually use it to your advantage.

When you are in the wealth building stage,

you have earned income.

And if you're aiming to be financially independent,

a large portion of that income is being

diverted into investments.

So that means on a regular basis,

you are putting substantial amounts of your income

into the market.

That, by extension, means when the market drops,

you're getting to buy things on sale.

Now, you're not going to try to time this,

because we know we can't do that.

But what it does mean is that when the market drops,

you should celebrate.

Because, oh, I'm getting to buy, when I put that extra $1,000

or $10,000 or whatever it is in each month,

I'm getting more shares in my VTSAX

than I would have gotten otherwise.

The volatility works to your advantage in that fashion.

So you sleep easily at night, because you don't care

what Mr. Market's going to do.

Now, when you move to the wealth preservation stage,

you no longer have that income stream to smooth the ride.

And that, in my world, is when you add bonds,

and bonds become like ballast in your sailing ship.

Where your flow of income was before,

now you're going to replace that with the ballast of bonds.

And that means that when the market plunges,

the stocks plunge, and you reallocate

to stay at whatever allocation you've chosen,

you'll be selling bonds, which have gone up

as a percentage of your portfolio.

Let's say, as I do at the moment, you have 30%

bonds, 70% stocks.

When stocks plummet, that percentage of bonds

is going to go up.

You sell some of those bonds, and you're buying those stocks

at lower prices, just like your cash flow was

allowing you to do it before.

When stocks go back up again and suddenly that percentage

of stocks start to outweigh where you want it to be--

it gets above 70%--

you start selling some of those off to replenish your bonds.

With those two strategies, you no longer

have to care whether the market is going up or down,

because you know that over time the market is going to go up.

And you've eliminated the concerns with volatility.

So I would embrace those two concepts--

understand that you don't ever sell in a panic

just because it went down.

That is simply not an option that you will ever consider.

And then depending on which stage you're in,

either use bonds or use cash flow to smooth the ride.

RACHEL SMITH: All right.

We're ready to go to some live questions.

AUDIENCE: Thank you for coming.

So I just had two questions about the future.

So number one--


J.L. COLLINS: You are addressing the wrong guest.

AUDIENCE: I'll try anyway.

So earlier in the talk, you mentioned a very simple


what do you do with your money, put it

in VTSAX or a similar fund.

So that one sentence-- it seems like you

can do that in a matter of a few clicks as an individual.

So my question is about the financial advisor system--

the kind of larger system, where you're calling someone

on the phone and having them essentially

do the exact same thing.

My question is, how do you see that changing as the world

becomes more financially educated?

And then as a corollary to that, the broader system--

if everyone kind of buys into this indexing idea,

are there any systemic risks to the entire world

investing in an index?


So with financial advisors--

I think in fairness to financial advisors,

they can be useful in a wide range

of subjects other than making your investment

choices for you.

But one of the chapters in my book

and one of the posts in the stock series

is "Why I don't like investment advisors."

Because if you embrace the simplicity that I suggest,


from at least an investment point of view,

as you well point out--

why would you need an advisor to do what you

can do in a handful of clicks?

And when I gave my talk at Chautauqua

when I was preparing that talk for last year,

I took a little different approach

than I had taken before.

And I was thinking about the content of my book

and the content of my blog, and I'm

trying to boil it down into one line or one phrase.

And really, what I came up with is

my advice is, buy VTSAX, buy as much as you can,

buy it whenever you can, and hold it forever.

And it's really that simple.

And as you say, it's a matter of a handful of clicks.

The second question-- and this is

one that's in the financial community a fair amount-- is,

well, what if everybody embraces indexing?

What's that going to do to markets?

And the problem that's suggested is

that indexing simply buys every stock, where stock pickers--

whether they're individuals or fund managers--

they're the ones who are trying to evaluate companies

and thereby creating a trading mechanism that

looks at some sort of objective parameters

and comes up with the values.

And is there a danger to that going away as everybody

embraces indexing?

I'm not concerned about it.

I don't know if there's a danger or not,

because it's hypothetical.

I'm not concerned about it, though,

because indexing at the moment accounts

for 20%, 25% percent of the market.

It is growing.

More people are embracing the idea.

But I think if it continues to grow, what I think will happen

is as that sliver of active management

becomes narrower and more and more people are indexing,

the opportunity to actually outperform the index

will start to increase.

And as that happens, you'll have some of those active managers

posting success stories, and that will begin

to tilt it the other direction.

And I think the other reason I'm not concerned about indexing

taking over the world is because-- as I mentioned

earlier in answering one of your questions--

it is counter-intuitive that it is so powerful.

It's part of human nature to want to think

that you can outperform.

It's part of human nature to want to best the benchmark.

I still have the disease.

Every now and again, I'm still trying to pick stocks.

So I think that aspect of human nature

is also going to keep indexing from ever

taking over the world.

Does that help at all?

AUDIENCE: Yes, thank you.

J.L. COLLINS: My pleasure.

Thank you.

AUDIENCE: Hey, J.L., thanks for coming today.

J.L. COLLINS: Thank you for having me.

AUDIENCE: My dad and I go back and forth on this all the time.

But do you see any advantage to trying

to diversify away from the S&P 500

and think about either global markets, or bonds,

or commodities?

J.L. COLLINS: Well, bonds, as I mentioned,

I think you add bonds depending on what point in your life

you are as ballast for your investment ship.

And other than that, I don't see a role for bonds.

What's interesting to me about that question

is the S&P 500, as the name suggests,

owns basically the 500 largest American companies.

VTSAX, which is a total stock market index fund, owns--

and it varies-- about 3,600 companies.

When I first started investing and it

was before such things existed or they were just

coming on stream, the idea of being diversified was--

because the vast majority of people

were picking individual stocks.

They had to, because that was available.

There were some mutual funds out there.

But the advice given to individual investors

then was, you know, you want to pick seven, eight, nine,

maybe 10 industries.

And inside those industries, you want

to pick two or three companies.

And then you have a diversified portfolio,

because you really can't physically and mentally

follow more than 20, 25, maybe the outside 30 companies.

And that was considered to be a well diversified portfolio.

So when somebody says to me, do I

need to diversify beyond 500 companies,

I think you're there.

I think you're there.

Now, the international aspect of it--

I'm a little at odds with the rest of the world

or most of the rest of the world.

The advice that most people give is

that in addition to buying the S&P 500 or VTSAX, which

are US companies, you need to buy funds that can put you

into the rest of the world internationally

from other countries.

Vanguard itself gives that advice.

I don't buy it, at least not yet.

The US is still very dominant in the world economy.

It will continue to be dominant for the foreseeable future.

But more importantly, those companies

in the index in the S&P 500--

especially in the top 100 of those companies,

Google as an example--

are international companies by definition.

So if you're investing in the S&P 500--

and, of course, the S&P 500 is 80% of VTSAX--

you, by definition, are invested in the world.

AUDIENCE: All right, well, you just proved my dad right, so.

RACHEL SMITH: Before we take our next live question,

I want to go to the top voted question on the Dory.

So the question is from Stephanie here in Chicago.

She said, a lot of Googlers receive a significant portion

of compensation in Google stock.

Oftentimes, there are strong camps

who never sell a share or those who sell it all

and diversify immediately.

What are your thoughts on holding the Google shares,

since we're all extremely invested

in the success of Google?

J.L. COLLINS: Well, that's a politically loaded question.


Somehow, I think I should say, hold Google.

But that's actually not my opinion,

and that has nothing to do with, by the way, Google stock

or what I see is the future of Google.

The problem I have is in looking at the question--

when she says we're all extremely invested

in the success of Google, that's a great thing,

but that's also an emotional thing.

And I think you need to separate your emotions

from your investing.

So you all want to see Google go forward

and succeed and prosper.

It is your career.

It writes your paychecks.

And therein lies the problem, because when you are also

invested in Google, you have more and more eggs in that one


I don't know what the future of Google is,

and nobody really does.

Everybody in this room presumably in the organization

is striving to make that future wonderful and profitable going

on indefinitely-- and have done a wonderful job so far.

But the world is filled with people who

are trying to eat your lunch.

I think back to General Motors.

So when I was a kid in the 1960s, General Motors--

who has kind of had a rough go of it

in most of your lifetimes--

in the 1960s, the federal government

was on the verge of breaking up General Motors,

because nobody else could compete with them.

General Motors was so dominant that the government was

concerned that no other car company would

be able to compete and they would have to step in.

And they were specifically talking

about splitting off the Chevrolet division, which

was just huge and dominant.

Well, of course, history tells us two things.

It tells us, one, the government chose not to do that.

And two, that they didn't need to worry,

because the world was filled with other companies waiting

to eat General Motors' lunch the moment they slipped up--

or simply the moment the competitor figured out

a better way to do it.

So you have to be very careful in putting all of your eggs

into the same basket where you work.

Going back to the question the gentleman asked earlier

about the S&P 500, I would rather own the S&P 500--

or at least have the bulk of my net worth in the S&P 500--

because now I don't have to guess who's going to win.

Because the losers fall off, and the winners go on to prosper.

One of the beautiful things about the index

is what I call self-cleansing.

And by that, what I mean is that if you

look at any specific company in that index,

you can only lose 100% of that company.

But any other company in that index--

and Google is a wonderful example

of this over the last few decades--

can grow exponentially.

There is almost no limit to how far it can grow.

So that's kind of a winning combination.

The losers fall off, and they don't actually go to 100%

before they get delisted.

But the losers drift away, and you are continually

getting new blood added to it as new companies come up.

And you get the benefit from those who succeed,

and all those companies are filled

with people who are working hard to make sure

that their company succeeds.

And as an investor, I don't have to figure out

who the winner is going to be, because I own them all.

RACHEL SMITH: We have time for one more question.

AUDIENCE: So I was going to ask two, but I think they're quick.

The retirement-date funds-- thoughts on those

target retirement-date funds?

So automatically adjusting allocations as you're

closer to retirement--

thoughts on that?

Or do you think you should just do allocation yourself

through the various bonds and Vanguard funds on your own?

And then the second one was just really about in what

scenarios would you find it helpful to use

a financial advisor.

I find doing it on your own is great, but at some point,

you want some kind of reassurance

you're doing it well--

not for investment banking, but you have to go to someone

to get insurance, et cetera.

J.L. COLLINS: OK, so a target retirement fund,

just to kind of quickly explain what that is.

There are mutual funds out there--

Vanguard has them-- which are called target-date retirement

funds or target retirement funds.

And the idea is that it's what's called a fund of funds, which

means it is a mutual fund that holds

a bunch of other funds inside it,

usually five or six different funds.

And with a target retirement fund,

you pick a retirement date, and you buy the fund.

And as the gentleman just indicated,

you can hold it forever.

And automatically, the closer you get to that retirement

date, the more conservative the fund allocation will become--

that is to say, typically the more bonds they will add.

So the idea is you never have to adjust your allocation as you

get to it.

Now, so some people say, well, gee, I

might want to be more aggressive or less aggressive

than the retirement fund.

Well, you can adjust that.

If you want to be more aggressive,

just pick one with a retirement date

that's actually further out than your own anticipated


If you want to be more conservative,

you can just bring that retirement date in

closer than you were actually planning to retire.

And the idea is that you never have to do anything again.

It is not a bad approach.

If you really want to invest in a way that is completely hands

off where you really never have to think about it,

this is not a bad way to go.

And in fact, I have a post on this in the stock series,

and I think it's a chapter in the book.

I'm not sure if I put it in the book or not.

But there is a post in the stock series

where I talk about these things.

It's not a bad way to go.

What I suggest to people is that if you

can read through my stock series and you're

comfortable with what you read, or you read my blog--

or my book, rather-- and you're comfortable with what you read,

it is less expensive to simply do the allocation yourself.

And it's not very hard.

It doesn't take much time.

And that's the way I would encourage you to go.

On the other hand, if you read through the stock series

or you start reading through it and you say,

you know what, I just really don't want to.

This is just not my thing--

and there are topics, by the way, in my life

that I would have that reaction to--

then just skip down to the post about target retirement funds

and you can be done.

It won't be a bad thing to do.

And the second thing, real quickly, in terms of financial


again, I don't think you need them.

If you follow an approach like mine,

which is simple investing, you don't need them for that.

But there are other aspects where they can be useful.

The problem with financial advisors

is while there are good ones, there are a lot who are not.

And they're not for a couple of reasons.

One is simply they're not that competent.

But the other-- and a little more insidious--

is that their interests are not necessarily aligned

with what's best for you.

So if you read my post on why I don't like investment advisors,

one of the conclusions I come to is

by the time you know enough to choose an investment

advisor wisely, had you invested that time learning it yourself,

you would know enough to do it on your own.

AUDIENCE: Thank you.

J.L. COLLINS: Thank you.

RACHEL SMITH: We're out of time.

Thanks for coming to Google Chicago.

It's been a pleasure having you.

J.L. COLLINS: It's been a pleasure being here.

Thank you.


The Description of JL Collins: "The Simple Path to Wealth" | Talks at Google