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

by J.L. Collins

Here’s an important truth: Complex investments exist only to profit those who create and sell them. Further, not only are they more costly to the investor, they are less effective.

Avoid investment advisors. Too many have only their own interests at heart. By the time you know enough to pick a good one, you know enough to handle your finances yourself. It’s your money and no one will care for it better than you.

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

Life choices are not always about the money, but you should always be clear about the financial impact of the choices you make.

One of my very few regrets is that I spent far too much time worrying about how things might work out. It’s a huge waste, but it is a bit hardwired into me. Don’t do it.

Once the debt is gone, you need only shift the money to investments. Where once you had the satisfaction of watching your debt diminish, you’ll now have the joy of watching your wealth build.

There are many things money can buy, but the most valuable of all is freedom. Freedom to do what you want and to work for whom you respect.

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.

It is in this where the real magic is found. The stock market’s wealth-building power over time is nothing short of breathtaking. But so is the ride along the way. Whether you invest today or sometime in the future, I guarantee your wealth will be cut in half more than once over those 60 years.

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.

Remember that nothing money can buy is more important than your fiscal freedom. In this modern world of ours, no tool is more important.

For instance, you might own VTSAX in both an IRA and in a taxable account. Should you need to sell to rebalance that year, sell in the taxable account to capture the loss. You can deduct it against any other gain you happen to have, including any capital gain distributions. You can also deduct up to $3,000 against your earned income. Any loss left over you can carry forward to use in future years. (But be careful not to buy more VTSAX in your IRA, or any other of your investment accounts, within 30 days of selling. If you do, the IRS will consider this a “wash sale” and your tax loss would be negated.)

You can contribute to both a 401(k) and a Roth 401(k), but the total must fall within the annual contribution caps.

Those who plan to use this money to pay current medical bills are best served (as with all money you plan to spend in the short term) keeping it in a FDIC insured savings account. But, you can choose to invest your HSA anywhere. Such as in index funds like VTSAX. Once you reach the age of 65, you can withdraw your HSA for any purpose penalty free, although you will owe taxes on the withdrawal unless you use it for medical expenses.

As we sit back and ponder all this, an interesting option occurs. Suppose we fully funded our HSA and invested the money in low-cost index funds? Then we’d pay our actual medical expenses out-of-pocket, carefully saving our receipts, while letting the HSA grow and compound tax-free over the decades. In effect, we’d have a Roth IRA in the sense that withdrawals are tax-free and a regular IRA in the sense that we get to deduct our contributions to it. The best of both worlds. If we ever needed the money for medical expenses, it would still be there. But if not, it would grow tax-free to a potentially much larger amount.

So what’s my advice on picking a good advisor? Beats me. Doing so is probably even more difficult than picking winning stocks or actively managed mutual funds.

As we saw in Chapter 8, very rarely. You’ll recall the research shows ~20% outperform in any given year and looking at a 30-year period that drops to less than 1%. Statistically speaking that’s a rounding error; just so much noise. This is what your highly paid advisor is selling you. If you are a novice investor you have two choices: You can learn to pick an advisor. You can learn to pick your investments.

If you are just too nervous to follow this advice and the thought of the market dropping shortly after you invest your money will keep you up at night, go ahead and DCA. It won’t be the end of the world. But it will mean that you’ve adjusted your investing to your psychology rather than the other way around.

If you are locked into certain income needs, unwilling or unable to ever work again and your roots go too deep to ever seek out greener pastures, you’ll need to be much more careful. Personally, I’d work on adjusting those attitudes. But that’s just me. 4% is only a guide. Sensible flexibility is what provides security.

Over the years I’ve come across any number of people embracing life on their own terms. They are intent on breaking the shackles of debt, consumerism and limiting mindsets, and living free. They are filled with ideas and courage. This freedom, to me, is the single most valuable thing money can buy and it’s why I offer you the strategies in this book.

If you have money you have risk. You don’t get to choose not to have risk, you only get to choose what kind.

Perhaps it is more useful to think not in terms of risk, but rather volatility. Stocks have far more volatility than cash and in return provide far more wealth-building potential. Cash has little volatility, but you pay for that in the slow erosion of its spending power.

We all must play the odds and make our decisions based on the alternatives. But in doing so we must also realize that fear and risk are often overblown, and understand that letting our fear control us carries its own set of risks.