Learning to invest isn’t something you can condense into a blog post. It requires broad knowledge on a dozen different topics ranging from financial independence to how markets fluctuate to stocks vs bonds, index funds, diversification, Vanguard vs other brokerages, how to choose what to invest in and dozens of other topics. JL Collins explored these topics in his very popular Stock Series, which spans 31 articles (!).
When writing my own “learn how to invest from scratch” guide in The Minimal Investor Course (it’s free), I picked out 10 topics that cut to the investing basics. I’ll be the first to say this is a topic that you could read 3,000 articles on and still have a lot to learn. When I realized this book was out, and it was entirely focused on solid rules for investing I was all in. I grabbed the audiobook for The Simple Path to Wealth on Audible and binge listened to it.
It’s a practical overview of investing — hitting on the why, how, what and even the mindset of investing.
Personal Stories Woven with Wisdom
Writing about a subject as dry as investing can make it tough to connect with people. I loved The Bogleheads Guide to Investing – that was the book that got me into investing. I would consider it more of a textbook or a guide though. In that one, you as the reader trust the takeaways because the math works out.
Collins takes a different approach: weaving in personal stories about the impact of his financial journey. He’ll often transition to facts after that, but with a story to anchor back to.
Another thing I really liked about this book was the question/answer style. As a long time blogger and finance person, Collins likely knew what questions to focus on that kept coming up over and over again. Here are a few of the questions he poses:
- Can everyone really retire a millionaire?
- Index funds are really just for lazy people, right?
- What is it about Vanguard anyway?
- Withdrawal rates: how much can I spend anyway?
This style of Q&A in book form could come off as a reference book, but these questions are sprinkled through the book where they make sense. As someone who’s created instructional content (usually for teaching people to code), this approach is well thought out and helps to cut off lingering questions.
A Blog Attention-Span Financial Book
This may sound negative, but it’s actually a huge compliment to say that the topics are elaborated on in concise, easily digestible sections. It would be easy to dive into a topic like 401k vs Roth IRA vs IRA for a hundred pages or give a dozen caveats on different portfolios you could set up. Instead, Collins picks his favorite and explains why believes it to be the path to wealth that makes the most sense.
Strong Opinions, Weakly Held
I came into this book with my own strong opinions on investing, but they are/were weakly held. For the most part, I was in complete agreement with the overall topics in the book. There were two, however, that challenged my own views and got me thinking – do I need to change my view?
Against Dollar Cost Averaging
I’ve always favored dollar cost averaging when you have a windfall. Collins goes against DCA’s, giving a straightforward reason: the market usually goes up. Consider two people – one who invests $12,000 today and another who invests $1,000 each month for the next year. Who would have more a year or two from now?
That’s an impossible question to know for sure. One fact helps – in the past 30 years, the market has gone up 25 years and gone down in 5 years. A 5 in 6 chance that your money is going to go up if you put it in the market today is pretty good odds. There’s also no guarantee that by dollar cost averaging you won’t invest at all of the wrong times still. You could DCA, then when you’re done the market could shoot down.
Collins convinced me not to dollar cost average windfalls for stocks. It’s all about time in the market rather than timing the market, and that’s still what dollar cost averaging is. If you’re curious about some of the math behind DCA’s, Actuary on Fire has a great rundown of why lump sum investing really does work out better in the long run.
I can see a place for dollar cost averaging in other non-stock strategies though. If you’re just learning how to invest, dollar cost averaging could provide you with confidence that you’re doing things right, and are investing money into the right places. If you’re crazy enough to invest in cryptocurrencies or other highly volatile investments, then dollar cost averaging bitcoin may make a lot of sense.
The Case for the 2-Fund Portfolio
There are a few core tenants of a good portfolio. Minimize your fees, reduce your taxes and be sure to diversify! In my own investments, I’m invested in more funds than I’d care to be. A lot of this is because selling them now would involve paying taxes. My ideal portfolio has 4 specific funds in it:
- US Stocks (VTSAX)
- Foreign Stocks (VTIAX)
- Bonds (VBTLX)
- Small amount (~5%) of real estate investment trusts (VGSLX)
The REIT fund here isn’t going to make a world of difference but adds a bit of diversification. The core part of this is the three funds that hold it up — US Stocks, Foreign Stocks, and Bonds. These are the core of diversification. Between these three you can invest in a little of every major company in the world, as well as governments through the bond fund. It’wide-rangingging investment breath through just a three fund portfolio.
Collins brought up an interesting idea though – do we really need 4 funds? What if we created a portfolio with just two:
- US Stocks (VTSAX)
- Bonds (VBTLX)
His argument is that due to globalization, US Stocks will closely mirror international stocks. Even emerging markets will march in lockstep with US funds. Here’s a quick look at these 4 funds compared over the last 10 years.
Looking at these 4 funds, it’s clear that bonds behave differently from the others. This is why I still invest in bonds – they are the best thing you can add to diversify your portfolio. The US Stock market is a no-brainer. Do you need more than that? International funds have correlated with US funds – when one goes up or down the other usually will too.
I do like the idea that for a beginner looking to invest that’s one less thing they need to learn (international funds). If someone can just invest in 1 US Stock fund and 1 Bond fund then that’s about as simple as you can get – short of a target retirement date fund.
Collins does mention that if you want to add international funds then that’s fine too.
Is this Diversified Enough?
I’m on the fence on this idea, but I’m not yet sold on this as being diversified enough. Diversification comes in the form of investing in enough areas to mirror where the money is. This has a side effect of minimizing your fluctuations by exposing you to the largest markets possible. Take a look at the image below from The Novel Investor – specifically at the “LG Cap” and “Intl Stock” rows.
You’ll see that before 2008, foreign stocks (emerging and international stocks) were rising more then US Stocks. Since 2008 and the Great Recession, US Stocks have been the big winners. Over the last 20 years, the combination of International and US Stocks balances out, leading to a portfolio with more worldwide exposure and less variance overall.
The question on if 2 funds is diversified, or if you need 3, 4 or more is largely a decision for each investor to make for themselves. I liked being challenged on this with the idea that perhaps 2 is plenty. Investopedia has a helpful definition of diversification that might help you make up your mind on what you would consider diversified:
The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Is there such a thing as too much diversification?
It’s easy to go overboard with diversification too. I recently opened up a Betterment account and a Wealthfront account. I’m writing an article on robo-investing, and I wanted to know how they work first-hand with some of my own money on the line. Wealthfront invested me in 6 funds – US Stocks, Foreign Stocks, Emerging Markets, Dividend Stocks, Natural Resources (Energy) and Municipal Bonds. That’s Wealthfonts idea of diversification.
Betterment, however, invested me in 11 funds! The big difference was instead of just investing in a general US Stock fund, it invested in a total US Stock fund + a large + a medium + a small cap fund. Rather than just investing in a bond fund, it invested in High-Quality Bonds, Municipal Bonds, Emerging Markets bonds and international funds. Here’s the full list:
To me, this is overkill. Wealthfront is a little closer to my ideal allocation (as is Collins allocation). I can see why these robo investors do this though – the more funds you’re in the more opportunities they will have to tax-loss harvest and potentially pickup small gains here and there. Whether these pose an advantage outside of that is hard to justify though.
An Investing Book With a Grounded Voice
If you’re wondering if you should read The Simple Path to Wealth, I’d give it my recommendation. If you’re looking for a textbook on how to invest, then this isn’t for you. If you’re looking for a focused way to invest that favors long-time horizons that lead to great wealth if you can stick to it, I’d say read it.
I’d also say this is a great book for someone who’s currently investing at Betterment or Wealthfront and is thinking about trying to learn enough to invest on their own. This could help explain why these robo-investors are doing what they’re doing behind the scenes. This is also the goal of my free Minimal Investor Course – helping people to make their first informed investment.
Wherever you invest, I’d encourage you to take the time to understand what you’re investing in, who’s getting paid for it, what your tax implications are now, and what they’ll be in the future. If you can figure these out — either with the help of this book or something else – you can make informed investment decisions.
8 CommentsWhy not add to the conversation below? Your voice is welcome!
Actuary on FIRE
January 19, 2018
I’ve not read it, but I appreciate your comprehensive review. Thanks for the shoutout on dollar-cost averaging, I’m glad I’m in agreement with Collins! Keep up the thoughtful articles!
January 19, 2018
Buffett seems to agree with Collins, as I understand his advice for his largess is to be invested in 90/10 (500 Index/Bond index) for his wife upon his final exit.
Like you, I have more funds than I’d ultimately like. But they really just mirror Vtsax/Vtiax/Vbtlx. I’m slowly working on reducing the number.
Thanks for the book review!
January 19, 2018
Great article. I also enjoyed his podcast with ChooseFI.
January 19, 2018
Loved the book, and started following Jim Collins philosophy on investing years ago. It has been a huge success from my investing standpoint after many years in practice. I bought and gave two copies of this book to my two twenty-something year old daughters over a year ago, and they are both now investing similarly. I do use a three fund approach: Total Stock Market VTSAX, Bond fund VBTLX, and International Fund VTIAX.
Happily early retired!
January 20, 2018
This book saved my ass. My finances are still jacked beyond all recognition due to enormous student loan debt, however after reading this book my financial perspective has changed 180 degrees. I’m now hardcore into frugal living, saving, paying down debt. My baby $1000 emergency fund was one of my proudest financial victories!
January 25, 2018
I read this book last year and enjoyed it. I think it’s also a good one to leave around for my spouse. I tend to handle the investments in our house, and if something ever happened to me, it’s nice to know that a single book can explain 95% of why our money is setup the way it is.
January 30, 2018
You should read EarlyRetirementNow’s thoughts on international diversfication. https://earlyretirementnow.com/2017/08/23/how-useful-is-international-diversification/
January 30, 2018
If not international stocks to diversify, what alternative asset class would be a good recommendation? Something that is not strongly correlated but with comparable rates of return over the long haul. TIPS??