The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life

by J.L. Collins

Money can buy many things, but nothing more valuable than your freedom.

The stock market is a powerful wealth-building tool and you should be investing in it. But realize the market and the value of your shares will sometimes drop dramatically. This is absolutely normal and to be expected. When it happens, ignore the drops and buy more shares.

financial independence is at least as much about being able to live modestly as it is about cash,

Do you think the average cost of a new car would be pushing $32,000 without E-Z financing? Or that a college education would cost over $100,000 if it were not for readily available student loans? Think again.

Once you’ve ingrained that lower spending lifestyle and made diverting the excess cash to your debt your path, you will have also created exactly the platform required to begin building your financial independence.

I am a firm believer in personal responsibility and that debts freely taken on should be faithfully repaid. But the ethics of encouraging 17 and 18-year-olds—who likely have little financial savvy—to almost automatically accept this burden give me serious pause. We are creating a generation of indentured servants. It’s hard to see the ethics or benefits in that.

if your lifestyle matches or exceeds your income, you forfeit your hopes of financial independence.

Stop thinking about what your money can buy. Start thinking about what your money can earn.

You have probably heard of “the magic of compounding.” In short, the idea is that the money you save earns interest. That interest then earns interest itself. This causes a snowball effect as you earn interest on a bigger and bigger pool of money. Like the snowball it starts small, but as it rolls along it soon begins to grow in a rather spectacular fashion. It’s a beautiful thing. Think of opportunity cost as its evil twin.

Mr. Buffett talks in terms of owning the businesses in which he invests. Sometimes he owns them in part—as shares—and sometimes in their entirety. When the share price of one of his businesses drops, what he knows on a deep emotional level is that he still owns precisely the same amount of that company. As long as the company is sound, the fluctuations in its stock price are fairly inconsequential. They will rise and fall in the short term, but good companies earn real money along the way and in doing so their value rises relentlessly over time.

As some stars fade, new ones are always on the rise. This is what makes the index—and by extension VTSAX—what I like to call “self-cleansing.”

The point is that to play this market timing game well even once, you need to be right twice: First you need to call the high. Then you need to call the low. And you must be able to do this repeatedly. The world is filled with sad investors who got the first right and then sat on the sidelines while the market recovered and marched right on past its old high.

Market timing is an un-winnable game over time. How can I be so sure? Simple: The person who could reliably do this would be far richer than Warren Buffett, and twice as lionized. Nothing, and I mean nothing, would be more profitable than this ability. That’s what makes it so seductive. That’s why gurus constantly claim they can do it, even if only a tiny bit. Nobody can. Not really. Not in any consistently useful way. Believing in Santa Claus is more profitable. Breeding unicorns is more likely.

The market always recovers. Always. And, if someday it really doesn’t, no investment will be safe and none of this financial stuff will matter anyway.

Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road is what you do during the times it is collapsing.

What is the worst possible performance a bad stock can deliver? It can lose 100% of its value and have its stock price drop to zero. Then, of course, it disappears never to be heard from again. Now let’s consider the right side of the curve. What is the best performance a stock can deliver? 100% return? Certainly that’s possible. But so is 200%, 300%, 1,000%, 10,000% or more. There is no upside limit. The net result is a powerful upward bias.

For my money (pun intended), no one has done more for the individual investor than Mr. Bogle. From launching Vanguard and its unique structure that benefits shareholders to creating index funds; he is a Titan in the financial industry, an investing saint and a personal hero. Now in his 80s, here’s what he has to say about successfully besting the market: “I’ve been in this business 61 years and I can’t do it. I’ve never met anybody who can do it. I’ve never met anybody who’s met anybody who can do it.” Neither have I.

Many years ago I had a martial arts instructor who was talking about effective street fighting. On the subject of high kicks he had this to say: “Before you decide to use kicking techniques on the street ask yourself this question: ‘Am I Bruce Lee?’ If the answer is ‘no’ keep your feet on the ground.” Good advice when you’re playing for keeps.

So too with investing. Before you start trying to pick individual stocks and/or fund managers ask yourself this simple question: “Am I Warren Buffett?” If the answer is “no,” keep your feet firmly on the ground with indexing.

Financial geeks like me are the aberration. Sane people don’t want to be bothered.

But if you are flexible as to your retirement date and more risk tolerant, you might stay fully in stocks right up until you make the change. In doing so the stronger potential of stocks could get you there sooner. But if the market moves against you, you’ll have to be willing to push your retirement date back a bit.

If space aliens arrive and enslave us all—unless you bought human feedlot futures—it’s gonna mess up your portfolio.

The idea that individuals can readily outperform the market is, to steal a phrase from my dad, horse hockey. Dangerous horse hockey at that.

If you are in the wealth accumulation phase you are aggressively investing a large percentage of your income each month. In a sense, this regular investing from your income is a form of unavoidable dollar cost averaging and it does serve to smooth the ride. But the big difference is you’ll be doing it for many years or even decades to come. And, of course, you don’t have the lump sum option.

The key thing his program and its parade of guests taught me is that, at any given time, some expert is predicting any possible future that could conceivably happen. Since all bases are covered, someone is bound to be right.

“Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.” —Groucho Marx

If you absolutely, positively want a sure thing and your yearly inflation raises, keep your withdrawal rate under 4%. And hold 75% stocks/25% bonds. Give up those yearly inflation raises and you can push up towards 6% with a 50% stock/50% bond mix. In fact, the authors of the study suggest you can withdraw up to 7% as long as you remain alert and flexible. That is, if the market takes a huge dive, cut back on your withdrawals and spending until it recovers.

we have the dividend and capital gains distributions from VTSAX in our taxable account sent directly to our checking account. Since the payment of these is a taxable event, it makes no sense to reinvest them only to turn around and withdraw the equivalent amount of money shortly thereafter.

as I am within ten years of age 70 1/2, I want to move as much as I can from our regular IRAs to our Roths, consistent with remaining in the 15% tax bracket. You’ll recall this strategy from our discussion on RMDs (required minimum distributions) in Chapter 20. Sixth, once we hit age 70 1/2 and are faced with RMDs, these withdrawals will replace those we had been taking from our taxable account.

I would not set up a 4% annual withdrawal plan and forget about it.

Assuming you neither want to be penniless or miss out on enjoying the extra bounty your assets will likely create, you’ll want to pay attention as the years roll by. This is why I think it is nuts to just set up a 4% withdrawal schedule and let it run regardless of what happens in the real world. If markets plunge and cut my portfolio in half, you can bet I’ll be adjusting my spending. If I was working and got a 50% salary cut I would, of course, do the same. So would you. By the same token, in good times I might choose to spend a bit more than 4% knowing the market is climbing and that provides a strong wind at my back. Either way, once a year I’ll reassess. The ideal time is when we are adjusting our asset allocation to stay on track.

True financial security—and enjoying the full potential of your wealth—can only be found in this flexibility. As the winds change, so will my withdrawals. I suggest the same for you.

Since the government actuarial tables are as good as they get, the payments are pretty much spot on with the odds. Here’s what, in order, you have to ask yourself: When do I need the money? If you genuinely need the money right now, nothing else matters. But each month you delay, your monthly check gets bigger. Do you think Social Security will collapse and stop paying? If you believe this, clearly you’ll want to collect while the collecting is good. For what it’s worth, I happen to think you’re wrong and I’ll explain why further on.

If your spouse is likely to outlive you, upon your passing he/she will be able to trade in their lower Social Security payments for your bigger checks. For example, my wife and I are both in good health. But looking at family histories, and because women usually outlive men, my best guess is that she’ll survive me. I figure I’m good to maybe 80-85. Were I alone, I’d start drawing ASAP. But she could easily see 95 or 100. When I die she’ll have the option of switching from her benefit to mine. Since mine will be larger, that’s what she’ll do. To maximize that check for her, I’ll delay taking my benefit until I’m 70. She’ll start hers at 66.

Another thing worth considering: As we reach advanced age our mental acuity diminishes. Managing our investments becomes harder. We become more reliant on others. At that point, a reliable monthly government check has more value than just the dollars.

During this accumulation phase, celebrate market drops. While you are in the wealth accumulation phase, these are gifts. Each dollar you invest will buy you more shares.