JL Collins: The Case for Simplicity
The author and financial blogger discusses why less is more in investing and his controversial take that homeownership often doesn't add up financially.
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Our guest on the podcast today is author and blogger JL Collins. He blogs about financial and other matters at JLCollinsnh.com. Collins' first book, The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life was published in 2016 and has been an international best-seller. His latest book is How I Lost Money in Real Estate Before It Was Fashionable. That one came out in 2021.
"Stocks--Part XV: Target Retirement Funds, the Simplest Path to Wealth of All," by JL Collins, jlcollinsnh.com, Dec. 18, 2012.
"Stocks—Part XIII: The 4% Rule, Withdrawal Rates and How Much Can I Spend Anyway?" by JL Collins, jlcollinsnh.com, Dec. 7, 2012.
"The Alfred Hitchcock Path to FI," by JL Collins, jlcollinsnh.com, May 5, 2021.
"The Trinity Study and Portfolio Success Rates," by Wade Pfau, Forbes, Jan. 16, 2018.
"Stocks—Part XXVII: Why I Don't Like Dollar Cost Averaging," by JL Collins, jlcollinsnh.com, Nov. 12, 2014.
"Truly Passive Real Estate Investing," by JL Collins, jlcollinsnh.com, Nov. 28, 2018.
"Why Your House Is a Terrible Investment," by JL Collins, jlcollinsnh.com, May 29, 2013.
The Psychology of Money, by Morgan Housel
Why Does the Stock Market Go Up? Everything You Should Have Been Taught About Investing in School, But Weren't, by Brian Feroldi
Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required, by Kristy Shen and Bryce Leung
Rich & Regular blog
Cashing Out: Win the Wealth Game by Walking Away, by Julien and Kiersten
Taking Stock: A Hospice Doctor's Advice on Financial Independence, Building Wealth, and Living a Regret-Free Life, by Jordan Grumet
Earn & Invest podcast
Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance and retirement planning for Morningstar.
Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.
Benz: Our guest on the podcast today is author and blogger JL Collins. JL blogs about financial and other matters at JLCollinsnh.com. His first book, The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life was published in 2016 and has been an international best-seller. JL's latest book is How I Lost Money in Real Estate Before it Was Fashionable. That one came out in 2021.
JL, welcome to The Long View.
JL Collins: Thank you. It's a pleasure to be here. I appreciate the invitation.
Benz: Well, we're really happy to have you here today, too. We want to talk about your path to finding a simple path to wealth, which is the title of your book. How did you get started as an investor? And how did you find your way to the minimalist investing path that you embrace today?
Collins: That's kind of a loaded question there. I'll answer the second part first. I found my way to the path I espouse now by basically wandering in the wilderness for decades and making every conceivable mistake you can think of. I first started investing in 1975, actually, and I had no idea what I was doing. I had accumulated the princely sum of $5,000, and I was working in downtown Chicago at the time. And on my lunch hour one day, I walked down Michigan Avenue to a brokerage office that I'd seen the storefront and walked in, and I said, "I'd like to talk to somebody about buying some stock." And they introduced me to the broker, and he sat down and asked me what, looking back on now, were actually pretty good questions. I had no frame of reference to that point. But he asked about risk tolerance and time horizons and all those good things they ask about, and he put me in the Southern Company, which was a utility serving the states in the South, and in Texaco, which, of course, was an oil company that I think has since been absorbed. And we split the $5,000 and put it in each of those two stocks. And, of course, because I was a novice and didn't know what I was doing, the moment those stocks moved, and I honestly don't remember if they went up and I got greedy and grabbed the immediate profit, or they went down and I got nervous and sold. But I didn't hold on to them very long. So, mistake number one.
Benz: And what were the mistakes after that?
Collins: Oh, they're too numerous to name individually. But probably the biggest one is that it took me so long to embrace indexing. There's an irony in that in 1975 was, if I'm correct about this, or close to it, the year that Jack Bogle first brought out the first index fund at Vanguard. And, of course, I had no idea that he'd done that. So, I can't regret not doing something I didn't know about. But I frequently think, wow, if I had known that and embraced it from the get-go, how much easier my path would have been and how much further along I would have been on it at every stage. But what I do blame myself for is a college buddy of mine in the mid-80s, who was an analyst with Duff & Phelps, introduced me to the concept of index funds. And it took me a decade after that, maybe a little longer, to finally let it sink in. And so, there's an irony when I hear people arguing against index funds today, it's my own voice that I hear ringing in my ears, because it's all the same arguments I made back in the day. So, that's probably my biggest mistake.
Ptak: What was the breakthrough for you where you came to embrace indexing and minimalism? It sounds like it was a trial by error to a certain extent. You probably became fatigued at making mistakes and sought an alternative. But what was it about indexing and minimalism specifically that appealed to you at that time?
Collins: Jeff, there wasn't a road on Damascus kind of moment. It was more a slow, gradual education and understanding. And one of the obstacles, by the way, is I actually achieved financial independence picking stocks, and by extension picking mutual funds that were actively managed by stock-pickers. And so, one of the problems for me at least with embracing indexing is it's not like what I was doing wasn't working. It, in retrospect, was just much more effort, and it wasn't working as well as indexing would have worked for me. But it was still working. If I'd been doing it and getting a negative result that in some fashion might have even been better, because I would have been more willing to look at alternatives and more quick to change.
Benz: What was your career path prior to you becoming a financial blogger? And what was the impetus for you to get started sharing what you had learned with a broader audience via your blog and your books? What were the things that made you want to communicate what you had learned?
Collins: Well, so the first part of that I was in the magazine publishing business, business-to-business magazines, which of course have little or nothing to do with investing. So, investing was an avocation rather than a vocation for me.
What made me finally put this stuff down in the blog was, I had tried very hard to introduce my daughter to these financial concepts. But I tried too hard. I pushed too hard, too early. Who knew that a four-year-old would want to go through The Wall Street Journal with you, but there you go. And I turned her off to all of this stuff. And I know that from experience, not only my own, but watching other people, that if you get money right, your life is far easier and more opportunities and rich and rewarding than if you don't get money right. So, it was just critically important to me that somehow I convey this information to her. And finally, I decided I better write it down against the day that she would be ready to receive it if I wasn't around. An associate of mine said, "This is pretty interesting stuff." I shared it with him. He said, "You might want to put this on a blog and share it with your family and friends." This was in 2011. And I had heard of blogs, but I joked that the first blog post I ever read was the first one I wrote. But it sounded to me like a good idea to archive the information. So, as my daughter likes to tease me today, says, "You know, Dad, if I'd listened to you, there'd be no blog, there'd be no blog."
Ptak: I wanted to turn to recent times for a moment, if I could, and I'm curious whether there have been any aha moments, so to speak, for you with respect to financial matters during the pandemic period?
Collins: That's an interesting question, Jeff. And I suppose it was more of a reinforcement. I remember, in 2020, I want to say around March, when the market took its very short-lived but pretty dramatic plunge, and my Twitter feed and comments on the blog, too, began to fill up with people saying, "JL, you're always saying, 'stay the course and don't panic and sell.' But this time it's different. This time, it's a pandemic." And my response was, every market crash and market crashes, in my view, are something that are a normal part of the process. You just have to learn to accept them if you're going to be in the market and enjoy the long-term gains that it can provide. You can't predict when they're going to come. But anyway, every market crash has something different and unique that triggers it. And in my view, the fact that it happened to be a pandemic, while especially tragic, because of the deaths that it caused, it was just one more kind of thing that can trigger a crash. And of course, I was proven right. The market did bounce back in stunningly a short period of time, which, of course, I had no idea that it was going to do and nobody else did, either. But I did know that the pandemic wasn't different than any other cause of any other crash. It was just the reason du jure.
Benz: You alluded to indexing earlier. And a key piece of advice that you've given again and again is that people should start out by putting as much as they can into a total stock market index fund. You usually reference Vanguard's and just call it a day, and then maybe eventually add bond funds for ballast. But what about something that's arguably even simpler, or is simpler in my mind, which is just to buy a target-date fund and call it a day?
Collins: Well, first of all, I agree with you, it is simpler. And I have a blog post on target-date funds. And I think I have a chapter in my book about them, too. I'm pretty sure. I have to look at that book again one of these days. I included a chapter about them. And the title of the blog post and the chapter is something along the lines of "The Simplest Path to Wealth of All" or what have you. I'm not a huge fan of them, because they are a fund of funds, and they own some funds that I wouldn't choose otherwise. But there's some subject matter, topics that are just harder for some people to absorb than others. Insurance is a subject, for instance, that makes my eyes glaze over. So, I'm keenly aware of the fact that investing, while I enjoy it, is a subject that makes the eyes of a lot of people glaze over. And I've written my book to be as simple as possible, The Simple Path to Wealth. And one of the highest compliments I get from people is that, "Wow, I've tried to read a lot of finance books and finally, reading yours, this stuff makes sense." So, that's who I'm writing for. That's my daughter, basically, who I'm writing for.
So, anyway. But I say, if you read my book, or you try to read my book, and your eyes are still glazing over, and this is just not something you want to deal with, then I think a target-date fund is probably a pretty good solution. But my book is pretty simple, and it does seem to resonate with a lot of people who are otherwise disinterested in this stuff. So, if you can read my book, and it makes sense, the principles and approaches make sense, then I think that's the better approach than target-date funds. But target-date funds are not a bad approach.
Ptak: To stick with target-date funds for a minute, if we could, it sounds like maybe you feel like they overdo it a little bit--not to put words in your mouth--just in terms of the number or type of exposures that are delivered through the fund-of-funds structure. Could you elaborate a little bit on that? Things like if you had to draw it up wouldn't be a part of a target-date fund, because you don't really think that they're unnecessary, or maybe the target-date fund overdoes it in some cases?
Collins: For instance, probably the biggest one of those kinds of things are the target-date funds have international exposure. And I'm not against international exposure, but I don't see the need for it. And again, they're a fund of funds, so some of those funds have higher expense ratios, higher costs than simply a basic broad-based index fund. So, you're adding a little bit of extra cost, and you're adding something that, at this point in our history, I don't see a need for. So, it would be the international stuff that is the most obvious.
Benz: Just to follow up on that, does that give you pause given that it seems like by most measures, non-U.S. stocks are inexpensive relative to U.S. today?
Collins: I think when people say that what they overlook is the idea that it's not just the thing you're buying, but it's where you're buying it. So, the fact that U.S. stocks are more highly valued than stocks in other parts of the world says something about the neighborhood those stocks live in. So, for instance, you can type into the internet, and I've seen these articles on a regular basis, of how much house does $1 million buy in various parts of the United States? They'll pick different locations in the United States and they'll show a picture of a house you can buy in Tennessee for $1 million versus Florida versus California versus New York. And, of course, the house you get for that set price of money is dramatically different depending on where it's located. So, I think when people say international stocks are cheap compared to U.S. stocks, well, that's true just like houses in Tennessee are probably cheaper than they are in California. But that's taking it a little bit out of context, because houses in California are in a different location than houses in Tennessee, and stocks in the U.S. are in a different neighborhood than stocks in the rest of the world.
Ptak: As much as you're a true believer in total stock market, you've indicated that sometimes you feel a need to scratch an itch to buy an individual stock. What kind of stocks are you attracted to and how have you done with them?
Collins: Well, Jeff, I refer to that as having the disease. As I think I alluded to earlier, I used to be a stock-picker, and I, in fact, achieved financial independence doing that. And there are a few things in life that are more intoxicating than choosing a company, buying the stock, and being proven right and watching it go up. That's a pretty addictive feeling. And I still have that addiction. I haven't owned an individual stock probably since 2013, 2014, something like that. So, I am sort of broken myself of the addiction. And one of the reasons is that I look at it, and I say, well, if I were going to buy an individual stock, that I'm not going to put more than 5% of my net worth in it. And I'm not going to build a portfolio of these things, because that's counter to my investment approach. So, I'd be just selecting one or two. Because if I'm wrong, I don't want it to move the needle too much. Of course, the corollary of that, if I'm right, unless it's some huge gain or it's not going to move the needle very much otherwise. To answer your question, if I were to do it--and again, I haven't researched these--but I am a big fan and very impressed with Elon Musk. He just seems to be an incredible guy in what he's accomplished. And depending on the price point, and Tesla things came down pretty dramatic recently, I might be looking at something like Tesla. I'm also very impressed with Zuckerberg. I know a lot of people don't like him. But when I listened to him being interviewed, he strikes me as an incredibly bright, incredibly thoughtful guy. And I think that's another stock that's been beaten down recently, and I imagine probably has some potential. And, of course, both of those stocks, they're not value stocks, shall we say? So, they're kind of high-fliers. And I suppose if I were going to add some spice to my index funds, I would want to look at that kind of thing. But again, I don't do it. And the other thing is that I own Facebook and Tesla by virtue of my VTSAX.
Ptak: If I can quick follow up on that. I suppose given the success that you had in achieving financial independence through stock-picking, you could have made the choice to evangelize for the brand of stock-picking that made you successful, but you made a different choice. Can you just talk about how it is you concluded that the right path to try to lead people toward is this more minimalist indexing-centric approach that you ultimately embraced?
Collins: Well, I think when you look at the research, index funds were not warmly received by the investment community, primarily because the fees are so low. And if you're an investment professional, there's less opportunity to get a bigger part of the clients' money out of them. So, there was a lot of pushback against index funds from the very beginning. But then, the longer they were around, the more research about them came out. And it just became more and more evident that it's very, very difficult for a stock-picker or an actively managed mutual fund to outperform the index over time. There's a certain percentage, and I think it's like 20% or 25% that will outperform it on any given year. But as you go out three years, that percentage drops, and by the time you go out 30 years, there's less than 1%, which is statistically zero. So, as Jack Bogle once said, performance comes and goes, but fees are forever. And, of course, fees are one of the reasons that active management is at a disadvantage to index funds as well. So, I've now forgotten your question, Jeff. But maybe that answered it.
Ptak: It did. Thank you.
Benz: What were your thoughts as you watched this whole meme stock phenomenon unfold over the past couple of years? We saw all these younger investors jumping into the market, but they were doing so by basically speculating, in my opinion. What were your thoughts when you were watching that unfold?
Collins: Well, Christine, you and I share that opinion. There's no question it was speculating. And, of course, I'm human. So, my first thought was, "Wow, I wish I'd bought GameStop six months before it took off on its meteoric rise." But, of course, I wouldn't have because I'm not a stock-picker anymore. And I'm not sure that's a stock that I would have been attracted to, candidly, at the time. So, my main thought was watching this is there's going to be a lot of tears for a lot of people. There are going to be a few people who are going to make a lot of money, which is always the case with speculation. And, of course, the media is going to focus on those and it's going to sound like, "Wow, if only I'd gotten into that meme stock, I would have made a lot of money." I mentioned earlier that I'm in Las Vegas at the moment. It's the same reason casinos have all the alarms go off when somebody hits the jackpot. The casino wants everybody in the casino to see people winning. But I think for most people, it's going to end in tears, or it probably already has ended in tears. And that's the case with most speculations. They'll make a handful of people rich, and the rest suffer. So, I'm not a fan.
Ptak: What's your view on how necessary mistakes are to ultimate success? Obviously, it proved pivotal to the success that you've had. Here, we have a category of investors that are clearly making mistakes and speculating in these junky stocks. Do you think the silver lining for them will be that it will prove pivotal to their future successes as it was to you? Or if not, what sort of intervention do you think is needed to set them on the right path?
Collins: I imagine, my father, for instance, I remember when I was a child, hearing that he had invested in some stock based on a tip that he'd gotten, not surprisingly, he lost money and, and he said, "I'm never going to do that again. The stock market is just a way for you to lose money." And I imagine that's going to be the reaction a lot of these people who go into these meme stocks, or who just go into the stock market in general without taking the time to educate themselves, and the market will leave you bloody if you do that, and most people are going to say, "Wow, that's a terrible thing. That's just gambling. I'm not going to go near that again." So, I think that's probably the reaction. The good news is, in this day and age, there is so much great information out there about how to approach the market correctly and successfully. And the right attitudes that you need to have to do that.
As to whether people can learn--one of the things that I wrestle with in my own advice. I've put it out there. I started my blog in 2011. And since 2011, the markets have done almost nothing but go up. There was the pretty sharp drop during COVID. But that was over in a month or six weeks or something. So, there's a whole generation of people who've never experienced a crash. And there are a lot of people who read my stuff. And, of course, I talk about the wealth-building power of stocks. I hope they're also reading the part where I'm talking about you have to expect crashes. Crashes are a normal part of the process. And it's very possible that one day you're going to wake up and your stock portfolio is cut by 40% or 50%. And if you can't tolerate that, and if you're going to panic and sell, then you don't want to follow my advice because it will leave you bleeding by the side of the road. Now that's all easy to say, and it's easy for people to understand in their head. But it's a lot tougher to actually weather a bear market or a crash. When you're watching your holdings dwindle in value, and I do sometimes wonder, are the people who read my stuff going to be able to weather that crash just based on having read about it? Or, as I had to do, are they going to have to panic and sell themselves and then sit on the sidelines licking their wounds, having locked in their losses, while the market, as it always does, turns around and goes back up? I don't know the answer to that question. I hope they can learn just by reading.
Benz: You do counsel people to de-risk their portfolios as they get closer to retirement or whatever kind of goal that they're working toward. So, at what point do you suggest that people should add bonds to their portfolio? What types of bonds? How should they embark on that de-risking process to protect themselves against the kind of downdraft that you were just discussing?
Collins: I write primarily for what's come to be known as the FIRE movement, an acronym that stands for "financial independence, retire early." I don't really like the "retire early" part of that, because the people I know in this might quit their day job, but they go on to do other productive things. So, basically, in my world, it's not a matter of age, it's a matter of cash flow. When you're working, and you have cash flowing in, and if you're smart and you're following my advice, you're taking a significant portion of that, and you're channeling it toward your investments. That's what allows you to benefit from the volatility of the market. Because if you're putting money in on a regular basis, as my daughter is, as an example, then when the market plunges, well, that's good for her, because she's getting more shares for those same dollars. She's buying them on sale. So, not only does she not have to worry about those market drops, they can work in her favor.
In fact, I say for young people who are just starting out investing, the best possible thing that could happen would be a major crash, because now you're just buying things at a lower level. But when you stop earning that cash flow, and you decide to retire, whether you're taking a sabbatical, or you've come to the age where you're not going to work anymore, then you need something else, it seems to me, to balance out the volatility of stocks, and maybe to provide some dry powder to take advantage of the plunges. And that's when I suggest that you add bonds to your portfolio. But that could come when you're 30, if you've achieved financial independence, as many people do, and you say, “OK, I'm going to not work anymore for a while.” Then you probably want to add some bonds to take the place of the cash flow that you used to have to smooth the ride. And maybe five years later, you wind up taking another job, then you cycle back out. So, it kind of depends on the phase of your life you're in at any given moment.
Ptak: I wanted to shift and ask you about retirement income. I think you've said that the 4% guideline can be a good starting point for people who want to decide if they've saved enough to be financially independent. Are you concerned that 4% could be too high in an era in which equity valuations are quite high and bond yields are so low?
Collins: I think there's been a lot of hand-wringing about the 4% rule of late in the last few years, and it kind of reminds me of a few hundred years ago, theologians evidently were debating about how many angels can dance on the head of a pin. I think the problem comes when people say 4% rule. I think if you change that and said 4% guideline, then you're good, because 4% is not a hard and fast rule. If you look at the Trinity study, a 4% withdrawal rate adjusted for inflation over 30 years is just one of the many scenarios that the study looked at. It happened to be one that had a 96% success ratio. And so, it became very popular. But the truth is when you look at that research, 4% is very, very conservative. Five percent, 6%, even 7% withdrawal rates were successful on many of those occasions. So, I look at the 4% rule and I say it's inherently conservative. And by the way, I don't mean to suggest anybody should start drawing 7% from their portfolio, at least not without looking at the Trinity study. So, I think 4% is a pretty reasonable and fairly conservative number.
Having said that, when I last hung up my last corporate job, I think my withdrawal rate was about 5% because my daughter was in college at the time, and I was comfortable with 5%, because looking at the Trinity study, 5% has an extraordinarily high success ratio. But I was very careful to keep an eye on what the stock market was doing. And fortunately for me, during those years, the wind was at my back. As I mentioned earlier, the markets done nothing but rise for the most part over the last decade, and I've benefited from that. Had the market turned around and plunged again, then I would have adjusted that withdrawal rate in a heartbeat. And so, I don't think anybody would, and certainly nobody should, say I'm going to withdraw 4% or 3%, for that matter, and I'm going to just do that automatically and I'm never going to think about this again, because there is a risk inherent in it. The 4% rule, even before the current environment you were describing, did fail 4% of the time--no connection to the two numbers. So, you're never going to want to do any percentage withdrawal and just set it and forget about it--not only because you might run out of money, but even more importantly, and more likely, your money is going to grow far beyond that withdrawal rate. And if you don't pay any attention, you could wind up 30 years later with a huge pile of money that you could have enjoyed along the way. So, you not only want to monitor it so you don't run out, you want to monitor it so you get the maximum benefit from your holdings.
Benz: One area where you run counter to the conventional wisdom is that you're not a big fan of dollar-cost averaging. You note that the market usually goes up. So, you're just better off getting that money to work in the market as soon as possible. That makes sense for people with long time horizons. But what about for people who are closer to drawdown or financial independence--whatever you want to call it--who do come into a large sum of money? Are they better off dribbling it in over time to protect themselves against the risk of plowing a bunch of money to work into the market at precisely the wrong time?
Collins: Christine, first of all--and you've alluded to this already--but let's be clear that when I was talking about my daughter and that she's putting money in on a regular basis, and that smooths the ride, that's a form of dollar-cost averaging. And I'm very much in favor of that. But the kind of dollar-cost averaging you're asking about, and you did make this clear, is what if you wind up with a lump sum of money for whatever reason. And in that case, as you correctly say, I am not a fan.
My thinking about it is this. If you dollar cost average, it's only going to work for you if for whatever period you choose to deploy that money, the market goes down. Because if the market goes up, that means that every additional amount of money you put in, you're going to get fewer shares for that. So, let's say, to make the math easy, you have $120,000 that your rich uncle has left you. And you say, “I don't want to take the risk of putting this $120,000 in all at once because tomorrow might be the day the market crashes 40%. So, I'm going to break it up into $10,000 chunks and I'm going to invest it over the next year.” Well, if the market goes up, the second month you invest you're getting fewer shares for your $10,000 and the third fewer and fewer. So, you will wind up with a less-good result at the end of the day. By the same token, if the market just stays flat, your result will be less because it took you longer to put that money to work. The only time that you benefit is if in fact the market drops, whether it drops suddenly or just drifts lower over that year, then it will work in your advantage.
We have to sit back and say, “OK we have to make a choice. Which of those things is more likely? Is the market more likely to go up over this year, I'm going to do it? Or is it more likely to go down?” Well, the market goes up three out of four years. To be clear, it doesn't go up three years, and then go down a year, and then go up three years and down a year. It's not that reliable; but on average. So, you have 75% chance of doing less well with your dollar-cost averaging against the 25% chance of maybe it working out for you. So, that's one of the core reasons, I'm not a fan of dollar-cost averaging.
But here's the kicker. Let's suppose that you dollar cost average, and maybe the market drifts up a little bit, maybe it drifts down a little bit. But at the end of the day, you've got your $120,000 deployed. And then, the day after that is the day the market drops 40%. My point being, you haven't protected yourself from that drop you fear at all. Because the moment you're invested, whether you dollar cost average in or you lump sum, you are always at risk of the market dropping. And as we talked about a little bit earlier, nobody knows when these drops are coming. If you're going to panic and sell, you don't want to follow my advice, you don't want to be in the market at all. You have to be willing to accept the fact that at any given moment, the money you have invested in stocks has the potential of dropping dramatically. And so, dollar-cost averaging doesn't protect you from that, at least not in the long term, and you should be investing for the long term.
Ptak: I wanted to shift over to real estate if we could. I believe you said that one of your most popular and controversial posts is about why homes are almost always a bad investment. Can you sum up your thesis on that?
Collins: Jeff, that is the post that has been the most popular in terms of views. It's the one that's garnered me the most hate, and it's the one that's also garnered me the most love. And, of course, it depends on the person who is reading it.
Homeownership is the American religion as James Altucher has said a number of years ago, and that's not an accident, that's by design. During the 1930s, in the depression, the government made a concerted effort to help people get into homes, because they were concerned about political unrest. And the feeling was that if people owned their own home, they'd be more settled, they'd be less likely to be restive. So, there has long been a push in this country to own your own home. It's the American tradition.
And there are a lot of stories, kind of like the meme stocks, of people who buy houses, and the house goes up dramatically, and they do very well. And the media loves those stories. They tend not to talk about the Detroits of the world. So, there are lots of times when people buy houses. And if you bought a house 20 years ago in San Francisco, you have a great story about how you made a ton of money. If you bought a house 20 years ago in Detroit, you'd probably have a very different story.
Twenty years from now, it may be that if you bought a house in Detroit, maybe this is the new renaissance city, and you'll be the one who has done very well. And maybe if you bought a house today in San Francisco, 20 years from now, for some reason San Francisco declines and becomes the next Detroit. I'm not predicting either of those things to be clear, just as an example. So, anyway, there are always times when houses can be made to look like the best thing that you've ever done. But the truth is that houses more commonly don't rise in value much over inflation, and sometimes they struggle to do that. They are always a drain on your financial resources, not just with the mortgage, but with the taxes and with the maintenance. People rarely buy a house without wanting to upgrade it. So, that's a new expense and tends to be a big one. You're going to furnish it and most people when they buy a house are buying bigger space than what they were renting. And all of those companies that supply those things like furniture, and realtors, and mortgage companies, and appliance companies, all these people have a motivation to maintain the idea that owning a house is the best possible thing you could do.
I'm not against homeownership. I've owned houses most of my adult life. But I view them as a lifestyle choice, not an investment choice. I view them as an expensive indulgence if you will. And there's nothing wrong with indulgences. That's one of the reasons we work hard and save and invest money. But I think that if you are young and your goal is to achieve financial independence, one of the key things you want to do is keep your housing expenses as low as possible. And with very rare exception, renting is far more powerful than homeownership and your lower monthly costs in that apartment over owning that house with all the expenses that come with it, invested in index funds over time will probably make you much wealthier.
Benz: So, a counterpoint is that the fact is that homes are really illiquid. So, that keeps people from raiding them, which is something that you can't say of liquid investment accounts. Can you talk about that? I know you've talked about this on your blog about how homeownership might actually make sense for people who would otherwise have trouble saving?
Collins: Christine, to be honest, I don't remember talking about that on my blog. But you may have looked at the blog more recently than I have.
Benz: I did. I saw it there.
Collins: But I do agree with that. And my own parents were a good example of that. I think I mentioned a little bit earlier in our conversation that my dad had dabbled with stocks based on some tips and he got burned and that was the end of that. And when he died--and he died at a fairly young age of emphysema, he was cigarette smoker--the only asset he left behind was the paid-off house. And, of course, that was salvation for my mother. A great example of just what you're talking about. And from that point of view, for somebody who lacks discipline or doesn't even think about it, like my parents, owning a house long term can wind up being a valuable asset.
Of course, in today's world, it's a lot easier to take the equity out of your house. There's a lot of promotion designed to encourage people to do that. So, it's less of a slam dunk from that point of view. But my bigger objection to it is that it's not a very effective financial way to build wealth. My father would have done better had he learned about the stock market than just the house. And I always cringe a little bit with strategies that involve compensating for people's psychological shortcomings, rather than the dealing with those shortcomings so they can do better. And so, the shortcoming in this case is someone who lacks the discipline and maybe the knowledge to save and invest, and so, we'll put him in this underperforming asset just because they can't get out of it easily. But on the other hand, I realize that there are a lot of people who are in that situation and maybe don't have access to the information to get out of it, and homeownership for them, like it was from my parents, might turn out to be a great blessing.
Ptak: As you point out, sometimes people can get lucky in the property market. But do you think that with today's rapidly accelerating home prices that new buyers are apt to be especially unlucky with their timing?
Collins: That, Jeff, is a question that pertains to us, personally. Our life is nomadic, and we have a little cottage on Lake Michigan. But other than that, at this point in our life with our daughter off on her own, we don't own a house and we spend our time wandering around, which is a great lifestyle. But as I'm getting older, I'm thinking, I really do need to figure out where I'm going to settle down for the final chapter. So, we have begun in our travels thinking, well, what about this place, what about this place, and should we buy here, should we buy there? And, of course, as you alluded to, housing prices have just exploded on the upside over the last couple of years. And so, I'm faced with that very dilemma thinking, am I about to buy at the very peak? And particularly seeing as we're probably most likely to build a house, and that's a 12-month process, so am I about to commit to a very expensive indulgence and not even have access to it for the next 12 months only to find when it's time to move in its value has been cut in half, like in '07, '08? So, I don't know the answer. If anybody does, I'd love them to share it with me.
Benz: Sticking with real estate for a second longer, you mentioned that you're active in the FIRE community, which is the financial independence, retire early group. Many of these folks, and Jeff and I have interviewed several of them on this podcast, they focus on passive income, generating passive income, especially from property ownership to help fund their living expenses. What's your thought on that strategy?
Collins: I used to own investment real estate when I was a younger man. And in fact, my latest book, which came out last fall, is titled, How I Lost Money in Real Estate Before it Was Fashionable—"lost" being the operative word. It's the sad tale of the very first piece of real estate I ever bought, which was a condo in Chicago. And if somebody sat down and made up a list of all the potential mistakes you could make buying real estate, it's like I went through that list and checked them all off before I signed the papers.
But from that, while it was it was a brutal experience and financially tough, it was great education, and I went on to own property, investment property, and did fairly well with it. But I stepped away from it because it just was too much like work and it was not the kind of work that I personally enjoyed. I don't see real estate as being passive. And I know that people make the case, well, I can get a property manager and what have you. But for anybody who has ever had a job where you're managing people, you know that managing people is not passive. And if you have a property manager, you're going to have to manage the manager. I don't see real estate as being a passive investment. I think it can be a great investment; it can be a very lucrative investment. But in my world, you need to think of it also as a part-time job and whether you try to find a property manager or you manage it yourself. And so, that's really the comparison you're making is, is this a good investment, not only a good way to deploy my money, but a big chunk of my time, and/or some chunk of my time? Whereas a broad-based index fund is only deploying your money. It takes virtually none of your time. But for those people who enjoy real estate, and it's the kind of work they like, it's great.
Ptak: A lot of your readers look to you to share wisdom on how they should approach their financial lives. Where do you look for wisdom on an ongoing basis? Are there any columnists, authors, thinkers who you especially appreciate? I know you mentioned Jack Bogle earlier. So, we can cross him off the list. Who besides Jack Bogle?
Collins: Well, before we cross him off the list, let me just say, he's a fiscal saint. The investing world for the average investor is far, far, far better because of Jack Bogle and what he did. And I'm old enough to have lived in that investing world before Jack Bogle and fortunately after Jack Bogle. Actually, as we talked about earlier, Mr. Bogle brought out his first index fund the same year I started investing, but that didn't benefit me for the reasons we discussed soon enough. But anyway, so I've experienced both. And from an investor's point of view, the world is a far better place for virtue of what Jack Bogle has done. So, far in a way number one.
The other thing is, there is so much great information out there these days that wasn't available when I was first starting. At the very beginning of our conversation, I mentioned that I found my way wandering in the wilderness basically. But there's no reason for people to do that. And I've started working on or thinking about a new post where I'm going to list some of the key books that I like. But some that come to mind as we're chatting here today, The Psychology of Money by Morgan Housel, which came out about a year ago, a great book. And I think it's a great companion to my book--very different than my book--but they make great bookends. Another one, that also I see as a great bookend to my own, is a fairly new one by Brian Feroldi called Why Does the Stock Market Go Up? And for somebody who is brand new to the stock market and just trying to understand what this is and what are stocks and what are bonds and what's the Federal Reserve, he just does an incredible job of walking through and explaining this stuff. And again, I think a great companion to my own book, if I can say it. And it's a book, by the way, that will sit on my desk going forward just as a reference, because there are a lot of things that people say, "What's the Federal Reserve, JL?" And I kind of blunder around trying to explain that, because I've never really thought about it. Well, Brian gives a very succinct explanation of what the Federal Reserve is, certainly more so than I could do off the top of my head.
And then, there's Quit Like A Millionaire, Kristy Shen's book, a great inspirational book. For the FIRE movement, there's a lot of pushback, and people say, "That's only for people making a big salary and were born to privilege." And when you read Kristy's story of growing up in China under the communists, and she's now a millionaire, it's not just for people born of privilege. Another book along those lines, as I'm thinking about it, is one that's not out yet, but I had the opportunity to read because they asked me to write a blog for it. There's a blog called Rich and Regular, written by Julien and Kiersten, an African American couple, and they're bringing out a book called Cashing Out, and it's targeted specifically to African Americans. And I think with the idea that there is a sense in some quarters that this whole pursuing financial independence somehow isn't available to African Americans and their book talks about why it is and how it is, and it does a great job. And I think it's certainly a great book for African Americans to read but a great book, I would say, for anybody who was thinking about following a path like this and is wondering, "Is somebody with my background that doesn't feel like it's typical, can I really do this?" So, that's another one. As I say, that's not out yet.
As I'm thinking about books that I'm reading that aren't out yet, I just finished a book called Taking Stock by Doc G, who does the Earn & Invest podcast. He was a hospice doctor and is talking about not just investing but how to live your life well and lessons from the dying and how to have perspective on not only saving and investing, which is important--as I said earlier, can make your life infinitely better--but also not letting it take over your life and recognizing the other kinds of wealth that are available to us that are not financial. So, those are just some. I'm sure I'm missing some other great ones, and my apologies to those authors. But there's so much great information out there that I wish it had been there in 1975 when I started.
Benz: This is a great list. I'm taking notes as you're talking and I'm happy to say that we have a couple of these folks already booked on the podcast for the coming months. Just to close, I wanted to get back to your Simple Path to Wealth. I think if people have been listening, they've concluded buy total stock market index, add bonds as you go along, avoid homeownership. What are a couple of the other key precepts that run through that Simple Path to Wealth?
Collins: I would just clarify, I don't say avoid homeownership. As I say, I've owned them for most of my adult life, but don't buy them as an investment; buy them when you can easily afford them, and they provide a lifestyle that you're looking for. For instance, when you have children and that sort of thing. And then, in some of the talks I've given, I'm famous for saying that my investment approach is pretty simple. It's, buy VTSAX, which is Vanguard's Total Stock Market Index fund. So, buy VTSAX, buy as much as you can, whenever you can and hold forever.
I think the core ones, and I talked about this on the blog and in the book, are spend less than you earn, avoid debt, and invest the difference. And those are the three keys. You can't become wealthy if you're carrying debt. I have a chapter in the book called the unacceptable burden. You can't become wealthy if you spend every dime that comes into your possession. Or more accurately, when people say, “JL, that sounds like deprivation, having to set aside money that I can't spend in order to invest.” And in my view, I've never seen it as deprivation. I've seen it as buying something that's more important. In fact, I've come to say these days that I've spent every dime that has ever come into my possession, and I spend it almost immediately. It's just that I've spent at least half of those dimes over the years buying the thing that was most important to me, and that's my freedom, that's my time. and you buy your freedom and your time by virtue of having investments. So, that's why I diverted 50% of my income over the years to my investments. I was buying what was most important to me. I was spending that money. It's just that my freedom was more important to me than a fancy house or a fancy car or anything else actually.
Benz: Well, JL, this has been a terrific thought-provoking conversation. Thank you so much for taking time out of your schedule to be with us.
Collins: Well, again, thank you for the invitation. I've had a lot of fun hanging out with you guys and the time flew by.
Ptak: We enjoyed it, too. Thank you so much.
Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.
You can follow us on Twitter @Christine_Benz.
Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.
Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.
Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)