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by
J.L. Collins
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January 1 - May 24, 2025
Money can buy many things, but nothing more valuable than your freedom.
Try saving and investing 50% of your income. With no debt, this is perfectly doable.
When you can live on 4% of your investments per year, you are financially independent.
“You know, if you could learn to cater to the king, you wouldn’t have to live on rice and beans.” To which the monk replies: “If you could learn to live on rice and beans, you wouldn’t have to cater to the king.”
Three things saved us: Our unwavering 50% savings rate. Avoiding debt. We’ve never even had a car payment. Finally embracing the indexing lessons Jack Bogle—the founder of The Vanguard Group and the inventor of index funds—perfected 40 years ago.
If you intend to achieve financial freedom, you are going to have to think differently. It starts by recognizing that debt should not be considered normal. It should be recognized as the vicious, pernicious destroyer of wealth-building potential it truly is. It has no place in your financial life.
If your interest rate is... Less than 3%, pay it off slowly and route the money to your investments instead. Between 3-5%, do whatever feels most comfortable: Either put the money to debt payment or investments. More than 5%, pay it off ASAP.
Houses are an expensive indulgence, not an investment. That’s OK if and when the time for such an indulgence comes. I’ve owned them myself. But don’t let yourself be blinded by the idea that owning one is necessary, always financially sound and automatically justifies taking on this “good debt.”
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.
Being independently wealthy is every bit as much about limiting needs as it is about how much money you have. It has less to do with how much you earn—high-income earners often go broke while low-income earners get there—than what you value. Money can buy many things, none of which is more important than your financial independence. Here’s the simple formula: Spend less than you earn—invest the surplus—avoid debt
Stop thinking about what your money can buy. Start thinking about what your money can earn.
Warren Buffett is rather famously quoted as saying: Rule #1: Never lose money. Rule #2: Never forget rule #1.
VTSAX. That in turns means you own a piece of virtually every publicly traded company in the U.S.—roughly
It is simply not possible to time the market, regardless of all the heavily credentialed gurus on CNBC and the like who claim they can.
20% decline, the official definition of a bear market?
“Simplicity is the keynote of all true elegance.” —Coco Chanel
long-held theory of efficient markets—which says existing share prices almost instantly incorporate and reflect all relevant information—is morphing into what he calls the “adaptive markets hypothesis.” The idea is that with new trading technologies the market has become faster moving and more volatile.
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.
I tell my 24-year-old that during her 60-70 odd years of being an investor, she can expect to see 2008 level financial meltdowns every 25 years or so. That’s 2-3 of these economic “end of the world” events coming her,
Most people lose money in the stock market. Here’s why: 1. We think we can time the market.
2. We believe we can pick individual stocks.
There, in 1929, is the Big Ugly Event. The Mother of all Stock Market Crashes and the beginning of the Great Depression. Over a two year period, stocks plunged from 391 to 41, losing 90% of their value along the way.
Governments love a little inflation. They can add money to the system, keep the economy humming and not have to raise taxes or cut spending to do it. In fact, it is sometimes called “the hidden tax” because it erodes the buying power of our currency. It also allows debtors, like the government, to pay back their creditors with “cheaper dollars.”
Simple is good. Simple is easier. Simple is more profitable. That’s a key mantra of this book
The Three Considerations You’ll want to consider: In what stage of your investing life are you? The Wealth Accumulation Stage or the Wealth Preservation Stage? Or perhaps a blend of the two? What level of risk do you find acceptable? Is your investment horizon long-term or short-term?
The Three Tools Once you’ve sorted through your three considerations, you are ready to build your portfolio and you’ll need only these three tools to do it. See, I promised this would be simple! 1. Stocks: VTSAX (Vanguard Total Stock Market Index Fund). Stocks provide the best returns over time and serve as our inflation hedge. This is our core wealth-building tool. (See Chapter 17 for variants of this same fund.) 2. Bonds: VBTLX (Vanguard Total Bond Market Index Fund). Bonds provide income, tend to smooth out the rough ride of stocks and serve as our deflation hedge.
3. Cash. Cash is good to have around to cover routine expenses and to meet emergencies. Cash is also king during times of deflation. The more prices drop, the more your cash can buy. But when prices rise (inflation), its value steadily erodes. In these days of low interest rates, idle cash doesn’t have much earning potential. I suggest you keep as little as possible on hand, consistent with your needs and comfort level.
Want a smoother ride? Willing to accept a lower long-term return and slower wealth accumulation? Just increase the percentage in VBTLX and/or cash. Want maximum growth potential? Hold more in VTSAX.
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.
1 Bonds are in our portfolio to provide a deflation hedge. Deflation is one of the two big macro risks to your money. Inflation is the other and we hedge against that with our stocks.
When you buy stock you are buying a part ownership in a company. When you buy bonds you are loaning money to a company or government agency.
If you are going to hold bonds, holding them in an index fund is the way to go. Very few individual investors opt to buy individual bonds, with U.S. treasuries being the main exception, along with bank CDs which act like bonds.
The two key elements of bonds are the interest rate and the term.
To help investors evaluate the risk in any company or government bond, various rating agencies evaluate their creditworthiness. They use a scale ranging from AAA on down to D, kinda like high school. The lower the rating, the higher the risk. The higher the risk, the harder it is to find people to buy your bonds. The harder it is to find people to buy your bonds, the more interest you have to pay to attract them.
So default risk is also the first factor determining how much interest your bond will pay you. As
Interest rate risk is the second risk factor associated with bonds and it is tied to the term of the bond.
When you decide to sell your bond you must offer it to buyers on what is called the “secondary market.” Using our example above these buyers might offer more than the $1,000 you paid, or less. It depends on how interest rates have changed since your purchase. If rates have gone up, the value of your bond will have gone down. If rates have gone down, the value of your bond will have gone up.
When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. In either case, if you hold a bond to the end of its term you will, barring default, get exactly what you paid for it.
the length of the term of a bond is our third risk factor
Bills — Short-term bonds of 1-5 year terms. Notes — Mid-term bonds of 6-12 year terms. Bonds — Long-term bonds of 12+ year terms.
If you are a bond analyst, you’ll graph this on a chart and create what is called a yield curve. The chart on the left is fairly typical. The greater the difference between short, mid and long-term rates, the steeper the curve.
Inverted Yield Curve and short-term rates are higher than long-term rates, investors are anticipating low inflation or even deflation.
Put all your eggs in one basket and forget about it. The great irony of investing is that the more you watch and fiddle with your holdings the less well you are likely to do. Fill your basket, add as much as you can along the way and ignore it the rest of the time. You’ll likely wake up rich. Here’s the basket: VTSAX.
Owning 100% stocks like this is considered a very aggressive investment allocation. It is aggressive and in this Wealth Accumulation Phase, you should be.
As an aside, there are studies that indicate holding a 10-25% position in bonds with 75-90% stocks will actually very slightly outperform a position holding 100% stocks. It is also slightly less volatile. If you want to go that route and take on the slightly more complicated process of periodically rebalancing to maintain the allocation, you’ll get no argument from me.
Now that I’m kinda, sorta retired and we are financially independent, me too. My wife and I hold some other stuff in our portfolio. But not much. Here it is: ~75% Stocks: VTSAX (Vanguard Total Stock Market Index Fund). Still our core holding for all the reasons we’ve discussed. ~20% Bonds: VBTLX (Vanguard Total Bond Market Index Fund). Bonds provide some income, tend to smooth out the rough ride of stocks and are a deflation hedge. ~5% Cash: We hold ours in our local bank.
The wealth accumulation stage is when you are working and have earned income to save and invest. For this stage I favor 100% stocks and VTSAX is the fund I prefer.
For
The difference in projected results between 100% stocks and an 80/20 mix of stocks and bonds is tiny. How those results actually unfold over the decades is likely to be equally close and the ultimate winner is basically unpredictable. For this reason, and favoring simplicity, I recommend 100% stocks using VTSAX.
