Unfortunately, my father was neither a saver nor an investor. And so, we went from being very comfortable to be very uncomfortable. It became a very difficult financial time for our family. I wanted to put myself through school, which is fine, but just to give you an idea, the change in economic status made a profound impression on me. It made me realize that the world is a very insecure place, and you have to take steps to protect yourself.

The way you protect yourself is to have financial resources that work for you if and when the time comes when you can’t or you no longer want to work. That’s what motivated me to look into investing. Then, it was just a matter of beginning to learn about what that meant and how to do it. That sent me on a decades-long journey. Many of those decades were spent making some really serious mistakes along the way. Sometimes, people ask me, “How do you know all this stuff?” If there’s a mistake to be made in investing, I’ve probably made it.

Robert Leonard  05:23

Did you go on to study finance or investing in college? Or did you do this as just a passion on the side?

JL Collins  05:30

It’s strictly an avocation. I was an English major, so no, I didn’t study finance or investing in college at all. It was something that I had an interest in, and learned on my own, as well. I think a lot of people learn a lot of things. But yeah, it was something that, fortunately, for me, I was fascinated by, and so the learning process was a lot of fun. It wasn’t drudgery.

But one of the things I learned in trying to convey this to my daughter is people like me, and presumably, like you, and maybe many of your listeners, we’re the odd ones out if you really like this stuff. But it’s important for everybody. As Kristy Shen, my friend who writes for Millennial Revolution and who’s a speaker at our Chautauqua says, “If you understand money, life is incredibly easy. If you don’t understand money, it can be incredibly hard.” My daughter doesn’t have any inherent interest in this stuff, but she knows it’s important. The beauty of the simple path is you just need to get a few things right, and then you can set it on autopilot and let it run while you go out and do more important things with your life than worrying about your investments.

Robert Leonard  06:39

I want to dive into some of my favorite concepts that you’ve written about in your book and your stock series. I also want to talk about some of the concepts that some people might consider controversial, or at least just different than the advice we hear given by other financial experts. Let’s first talk about why people must avoid debt, and what we can do if we already have it.

JL Collins  07:05

Debt, to me, is like being covered with blood-sucking leeches that just drain your life energy. My advice and I have a chapter in the book and there’s a post in the stock series on this if you’ve got debt, just like if you’re covered with leeches, you take out your sharpest knife, and you start scraping those little suckers off. That should be priority number one.

Now, there’s debt, and there’s debt. If you have student loans, which I find appalling, but nevertheless, is the way of the world these days, you may have a low-interest rate and a big number, and that may be a longer-term thing. Mortgages, if you own a house, are slightly different, but if you’re starting out young, and at the beginning, you’re really interested in financial independence, I would avoid buying a house. Or, at the very least, buy the most modest house you can, so you have the most modest amount of debt. Debt is a constant drain on you and your resources, and it’s a major obstacle to building wealth.

Now, the good news is if you have debt, and you take out that sharp knife, and you start scraping it off, which means basically, living below your means if you’re not already, and diverting the money you’re not spending into paying off that debt, you’re developing an excellent habit, which is living on less than you earn, and setting aside money to do more important things. Initially to pay off the debt, once the debt’s gone, if you continue that discipline, now you’ll have a flow of capital to begin investing and building your wealth.

Robert Leonard  08:36

So should people wait to pay off all of their debt before they start investing?

JL Collins  08:41

Well, I wouldn’t say you necessarily want to wait to pay off all of it, especially if you have student loans, especially with some of the horrific amounts that I hear about. If you have a mortgage, depending on what it is, you probably don’t necessarily want to wait. You would probably want to trim your living expenses in other places. But the best thing to do is to avoid the debt, to begin with.

Robert Leonard  09:07

Is it safe to say that maybe student loans and your mortgage, assuming they’re both pretty low rate, can be paid off as you invest? But anything else, car loans, credit cards, things of that nature, that might be a little bit higher interest rate, those should be paid off before you start investing?

JL Collins  09:26

I think you could say it that way. This is a common question that I get. Let’s take mortgage as an example. People will say, “Gee, should I pay off my mortgage first or should I invest first?” That depends on what your interest rate is. There’s a basic rule of thumb, and this is very general. I kind of say, “If you’ve got an interest rate of 3% or less, I probably would not be in a hurry to pay off that debt, and I would probably focus more on investing.” If your interest rate on whatever it is, whether it’s a house, credit cards, or car, is 6% or more, I’d probably say, “I’d focus on paying off that debt.” Because when you pay off debt, it’s the equivalent of earning that return. If you have, say, a 6% debt, 6% isn’t a huge return, but paying off your debt is a guaranteed return. Finding a guaranteed 6% return is not easy, so I would focus on paying that debt off.

Now, what about the debt between 3% and 6%? For then, it becomes a little more of an emotional decision. I particularly loathe having debt, so I paid off mortgages. I don’t own a house. I actually own a vacation house, at the moment, that we paid cash for, but when I own personal residence houses, I like to pay off the mortgage earlier, and I did, but that was more of personal preference. If you’re in that range of 3% and 6%, you can make the call based more on your own personal emotional comfort levels.

Robert Leonard  11:05

I’ve personally heeded that exact advice. I have a small car loan, but it’s at 0.74% because it’s from a few years ago. I actually worked at the credit union where I got the loan through, so we got a discount on the loan. Rates were at all-time lows. It’s under 1%. It just doesn’t make sense for me to accelerate that. I’ve just been slowly letting it take its time and investing the difference. I do have some student loans. But those are still, again, they’re only 4.25%, which is not too high for a relatively small student loan balance. So again, I’ve personally made that decision to just invest the difference, and just continue to make the monthly payments.

JL Collins  11:41

Yeah, I’d be very comfortable with that decision, on your behalf. And of course, obviously, if you decide that you want to pay down some of that debt, you would focus on the higher interest student loan rather than the very low-interest car debt.

Robert Leonard  11:56

Exactly. My next question made me chuckle a little as I was writing it and preparing for our conversation, but you’ve written that having FU money is important. What do you mean by that? And why is it important?

JL Collins  12:10

First of all, we have to define it. When I first started investing and going down this path, there were no computers. There was no internet. I had never heard of the concept of financial independence. In fact, I didn’t hear that concept until after I started my blog. Sometime in the early 70s, I read a novel by James Clavell, called Noble House. It’s an excellent book, by the way. If anybody is interested in that novel, there’s a character with an ambition to have FU money. That was a concept I’d never heard before, but it immediately resonated with me. What she meant by that goal was having enough money that she never had to work again, that she never had to take any guff from anybody again. That crystallized a vague goal in my mind. Also, I loved the term.

Now, in the book, FU money was the equivalent of financial independence, in other words, having enough that you never have to work again. In my mind, and especially after I came across the term financial independence, I define FU money as an intermediate step. So financial independence is when you truly have enough that you don’t have to work, and work becomes optional. FU money is the stage in between living paycheck to paycheck and getting the full FI. Every little bit you add to your FU money pile makes you that much stronger, that much more independent, and that much freer. It’s not an on/off switch from paycheck to paycheck to financial independence. There’s a long runway that’s very valuable in between.

Sometimes, for people starting on this path, it can seem too daunting to start from ground zero, or even in debt, and get all the way to financial independence. It’s important to understand that every step you take along that path improves your situation, makes you a little bit stronger, makes you a little more independent, and makes you a little freer to make bolder decisions. That, in my mind, is what FU money is. Now, part of your question was, “What makes it important?” And I think defining it defines why.

Robert Leonard  14:27

I think that’s such a great explanation. I’ve studied the financial independence movement, but I haven’t really come across many other people that talk about that area in the middle, between paycheck to paycheck and full FI. I think it’s really interesting that you’ve been able to define this, and really help people make it not so daunting for them.

JL Collins  14:44

You know, I certainly can’t claim to have created the term FU money as I found it in a novel, and I don’t even think James Cavell came up with it originally, but I’m pretty confident that I was the first one to introduce it to the FI community. I take some pride in that.

Robert Leonard  15:05

Why is understanding how to think about money a key to building wealth?

JL Collins  15:11

I think that most people have a very narrow idea of what money is. They see it only as a means to buy things. You can see this commonly. If you ever see people interviewed, “What would you do if you won the lottery?” Almost inevitably, you’ll get a litany of things that they would buy with very little concept of the kind of freedom that the money would provide. You can look at individuals who suddenly come into large amounts of money. They can be sports stars, movie stars, corporate executives, high-powered lawyers, and anybody who suddenly maybe has worked their way up honing their craft, and suddenly making a very large amount of money.

All too frequently, because they don’t understand money, people see it only as a means to buy things. It certainly is a means to buy things. That’s the reason money was originally created. To serve as a way of facilitating commerce between people. If you made shoes and I grew corn, we didn’t have to exchange corn for shoes. There was something else we could use that was more utilitarian. But money is so much more than that. Money can be your servant. Money can work when you can’t work. I think it’s important for people to take the next step and understand not just what money can buy, but what money can do if you invest it correctly.

Robert Leonard  16:42

I’m sure we’ll talk about the types of things you can do as you invest it correctly throughout the rest of the show. Where do you think traditional investing advice goes wrong? What actually works?

JL Collins  16:58

In the book and in the stock series, I have a chapter and a post on why most people lose money in the stock market. In essence, they lose money in the stock market because they don’t really understand what kind of animal it is. They tend to buy a stock or maybe a fund, usually on a tip from somebody, and they’re hoping it will go up. But then a bear market, like the one we’re in the middle of, happens, and they lose a bunch of money and sell out in a panic. They’ll say, “Wow, the stock market stuff is nothing but gambling. It’s like Vegas. I’ll never do that again.” Certainly, that’s part of what the stock market is. Speculators and traders spend a lot of their time buying and selling, hoping to take advantage of short-term moves in the market. It’s not the kind of investing I talk about.

I talk about long-term investing, investing for the decades. The way you do that is buying, consisting, and holding, and understanding the periods like we’re going through now. Bear markets are normal. You live in New Hampshire. It’s like being surprised if a blizzard comes through. If you live in New Hampshire, you shouldn’t be surprised by blizzards. It doesn’t mean they’re easy to deal with or pleasant. It doesn’t mean that they can’t do damage, but nobody should be surprised by it. It’s the same thing if you’re a stock market investor, as opposed to a speculator investor.

Nobody should be surprised by bear markets. It is a natural part of the process. If you’re young, and you’re growing your wealth, living on less than you earn, paid off your debt, and now channeling that money into an investment, when the stock market takes one of its periodic plunges –it does and always will, periodically, that simply allows you to buy more shares with your money.

My daughter, for instance, puts money into VTSAX, which is my favorite fund. It’s Vanguard’s Total Stock Market Index Fund. I actually put this up on Twitter and Facebook. I noticed that, in March, when she made her contribution, it went 19% more shares, then her contribution in February did. That’s the power of staying the course and continuing to invest. And, in that sense, a bear market like this one is an absolute gift to her, and to anybody else who’s building their wealth and adding regularly, as long as they don’t panic and sell.

Robert Leonard  19:26

I noticed that exact same thing. I work a corporate job, and usually, month-on-month, when I contribute to my 401-K, I don’t look at the fluctuations of how many shares of the S&P 500 index fund that I’m invested in is buying. It goes up and down a little bit week to week, but our annual bonuses that we get hit in mid to late March just happened to time perfectly. Everything had just dropped by 25% or 30%. Our bonuses got deposited into our 401-K account. I went in and I looked, and it bought so much more just because it was down 25% or 30%. I was just looking at that, myself, not too long ago, so I know exactly what you’re talking about.

JL Collins  20:03

Yeah, people like Warren Buffett and Jack Bogle, who founded Vanguard and created the first index fund, have been fond of saying that stocks are the only thing that when they go on sale, people run away. For anything else that goes on sale, we run to the store to buy more of it. Stocks go on sale, and people run for the exits. That’s what creates the opportunity for us.

Robert Leonard  20:27

That’s such an interesting dynamic because, for me, and you might be similar, but I’ve never seen it that way. I’ve seen and heard the quotes, and I understand that a lot of people are that way when things go down, they run the other way and take their money out. But for me, I’ve always seen that as an opportunity, and put more money to work in those times.

JL Collins  20:44

If you’re following my approach, that’s exactly the right thing to do. Let me make another point on that because, of course, what’s causing this bear market is the COVID-19 virus. This is the only bear market in my now-long investing career that’s been caused by a virus. People are saying, “This is really serious, so it’s different.” But every time there’s a bear market, what triggers it is serious. There’s never a bear market triggered by happy news. There’s always some underlining, very negative, very scary thing that triggers bear markets. Otherwise, it probably wouldn’t happen. So of course, this is scary. Of course, it feels different. They always do, but they never are. 

If a day comes where it truly is different and the market doesn’t recover, you’ve just witnessed, either the end of the United States as a viable country or the end of civilization overall. Then, it won’t matter where you’re invested. So, the current bear market is a great buying opportunity. 

I’m old enough to actually remember the Cuban Missile Crisis in the 60s when the US and the Soviet Union were on the brink of an all-out nuclear war. Talk about something that would have destroyed civilization certainly destroyed those two countries. What a wonderful time to buy stocks as they were depressed because of the fear of nuclear war. If the nuclear war happens, it doesn’t matter. If it doesn’t happen, which it didn’t, thank God, you can look at history from 1963 to now, what a tremendous growth you would have had from just investing then. So, whenever people think that they’re dealing with an end of the world event, and that’s what scares them, that’s a wonderful buying opportunity. The world ends, who cares? The world doesn’t end, you’re going to prosper.

Robert Leonard  22:36

Yeah, if, worst-case scenario, you have a lot bigger things to worry about than your investments going down 40%-60%, even to 0%. You’ll have a lot of bigger issues if that ends up becoming true. I love those points you made because I actually have been studying the market, so I know all of the crashes. Or, at least, I know them pretty well because I’m passionate about this material, and I love learning about it, but I’m too young. I didn’t experience any other market crashes. We’ve been in one of the best bull markets for 10 years. This is the first bear market that I’m actually personally experiencing, and so I’ve been trying to talk to a lot of other investors about how 2008 felt. How did 2009 feel compared to today? It’s interesting because everybody felt, back then, that that time was different. Everybody feels this time is different, but it’s just like you said. Everybody thinks every time is different; but ultimately, it never is. Things always come out on the other side.

JL Collins  23:26

Another thing is if and when the time comes where it truly is different, it also won’t matter whether you’re invested in stocks or something else. I got a comment on my Twitter feed from someone. I can’t quote it exactly. I retweeted it because I liked it, but he said something to the effect of, “wow, when you say it’s scary and painful to live through one of these things, you’re not kidding.” It was something along those lines. There was a commenter on my blog, named Gino, and I’m not going to quote him exactly, but he said something along the lines of “Times like these are the price we pay for the return stocks deliberates. Dealing with these ugly moments, that’s the price you have to pay.” It’s just like how, if you live in New Hampshire, which is a beautiful state, you have to be willing to deal with blizzards. There’s just no way around that. If you’re not willing to deal with blizzards, then don’t live in New Hampshire. If you’re not willing to live through bear markets, don’t invest in stocks.

Robert Leonard  24:29

We had gone through three to five days in a row where it was high-50s, low-60s, and everybody was so excited, exclaiming, “This is spring!” I went out riding my dirt bike, and we were having a great time. Then we just got six to eight inches of snow the other day. The analogy couldn’t fit any better. It’s exactly what you said about the stock market. It’s the same way.

JL Collins  24:48

I bet that native New Hampshirites, like yourself, wasn’t surprised by that. You’ve been down that path before, where it’s sunny and beautiful, and the next day it’s six inches of snow.

Robert Leonard  25:02

Like with the market, I’ve learned to never be surprised by the weather in New Hampshire.

I think we’ve alluded to it a bit over the last few minutes, but you have a saying that the stock market always goes up. I think what you mean by that is that things will go down, but in the long term, they go up. Is that more or less what you mean by that saying?

JL Collins  25:19

The stock market always recovers. Again, the day that it doesn’t mark either the end of the country or the end of civilization. I get a lot of pushback on that by people who are confused with volatility. The stock market is very, very volatile. It’s going up and down all the time. But if you look at a graph of the stock market over an extended length of time, you will see that volatility in sharp relief, but you’ll also see that the trend from left to right is relentlessly upwards. That’s not surprising because the stock market, especially the total stock record, which is what I recommend investing in, is simply all of the publicly-traded companies in the United States. And all those companies are continually vying with each other and with the economy to succeed. Some will in a spectacular fashion. In some cases, some won’t. Those that don’t fall away, they fall off the indexes. They either go out of business or grow too small to be listed, and they’re replaced by new dynamic companies coming up. That makes the index self-cleansing. It’s a term I coined, and I’m very proud of it. The old debris gets swept away with new exciting things, and that can keep growing. When you buy the index fund, you own a piece of every one of those companies and everybody from the CEO to the factory floor is working to make you richer. That’s going to work out over time.

Robert Leonard  26:57

The market always goes up. I agree with that statement. I’m not one of those that would argue with you over that. But why then do people still lose money when they’re investing?

JL Collins  27:07

I think the best way to answer that is to the way Warren Buffett answered it. Again, I’m not going to quote him exactly, but some years ago, he made the point, looking at the last century. In the last century, the market started, in the $600s, or something like that. I’m not remembering it correctly. But anyway, at the end of that century, it was up around $13,000-$14,000. Buffett said, “How do you lose money in a market that goes from 600 to 14,000?” There were even a couple of world wars and a great depression in the middle of that, to put things in perspective. And he answers that people try to dance in and out of it. They try to time it, and almost inevitably, if you do that, you’re going to be on the wrong side. You just have to get too many things right to make that work. People tend to buy when it’s high, and they tend to panic and sell when it’s low. That’s how you lose money. The best thing to do is buy when you have money, and just keep buying and hold it forever. That’s what I tell my daughter. That’s what I do myself.

Robert Leonard  28:13

You’ve mentioned Buffett a couple of times. He’s one of my favorite investors to study. But you don’t pick individual stocks much yourself, if at all. So, how has Buffett impacted you as an investor who buys, almost exclusively, just a broad stock market index?

JL Collins  28:32

Warren Buffett is an interesting case because the research is very, very clear that outperforming the basic index is a loser’s game for the most part. And yet, Warren Buffett is someone who’s done it over the decades. I cringe when people say,  I’m just going to pick individual stocks. I’m going to do what Warren does.” As if.

Warren is one of the reasons that he is one of the richest people in the world. One of the most lionized and famous, he has been able to do something that very very few people are able to do. The idea that you, and I, or anybody listening can replicate that is silly.

JL Collins  29:11

When I was growing up, Muhammad Ali was the greatest heavyweight boxer in the world. In my opinion, he still is the greatest of all time. That doesn’t mean that if I’ve gone through that same process, I’ll get the same result. I could do all the training that Ali did, be as fit, and could have Angelo hone my skills as best as possible, and still, if I get in the ring with Ali, he’d kill me. So, Warren Buffett has done something extraordinary, and the important thing is that Warren Buffett himself recognizes that. That’s why he recommends index investing when he dies for his heirs. Warren Buffett is not encouraging anybody to go out and try to buy individual stocks. If anything, he’s encouraging them to buy index funds, and that’s what he specified should be done at his death.

Robert Leonard  30:04

And just because you study Warren Buffett, like it sounds like you have, it doesn’t mean you have to pick individual stocks. You can still learn from all of the philosophies and all of the other different investing principles that he has that can benefit you as an investor even as an index investor. Like you said, investing when there’s blood in the streets, or be fearful when others are greedy, and greedy when others are fearful. Those principles apply to index investing, as well.

JL Collins  30:28

Yeah, absolutely. Warren Buffett has a lot to offer, and it’s well worth paying attention to what he has to say without thinking you can emulate what he’s accomplished through investing in individual stocks.

Robert Leonard  30:43

I think that’s a big disconnect, as I think a lot of people study him because they want to try and pick individual stocks, and replicate what he’s done. Whereas it might be a better strategy to study him and learn how he thinks about investing so that you can implement that type of thought process, or that type of thinking into your investing, even when it may not be about individual stocks.

JL Collins  31:01

Yeah, absolutely.

Robert Leonard  31:02

So, although we’re experiencing a bear market right now, over the last decade, we’ve experienced one of the strongest bull markets that the US has seen. Talk to us a bit about how people should invest in a raging bull market, as well as a bear market.

JL Collins  31:21

I’m almost glad this bear market is here. In fact, I am glad this bear market is here. I wish it hadn’t been triggered by something that kills people as that’s tragic, but when I started the blog in 2011 until just in the last few weeks, the market pretty much had done nothing but go up. In my writing, I talk all the time about how it’s volatile, and that you have to expect bear markets, etc. But there were never any bear markets for people to experience, and it concerned me that people would think, “These are imaginary things in JL’s mind that no longer happen.” Of course, now we know that they’re anything but imaginary.

Referring to a post I wrote probably wrote around 2014, Investing In a Raging bull, because in 2014 as well as the next six years after that, the market was a raging bull. Basically, the answer is the same. You just keep investing all the time. You invest regularly. You invest as much as you can, whenever you can. You don’t try to time the market. Don’t worry about it when it’s going up. Don’t worry about it when it’s going down. You worry about what it’s going to look like decades from now.

Back in the days before we could see everything instantly on computers, and investment companies mailed you your monthly statement, Jack Bogle was fond of saying to just invest. Don’t even open those statements. Don’t pay any attention to any of them for 20 years. When you open that final statement, have a cardiologist standing by because you will be stunned at how much it’s grown to. Investing is a long-term game. For those of us who are in it for the long term, and in my opinion, that’s the only way you should be in, it doesn’t matter whether it’s going up or down. I don’t know. Right now, I don’t know where the market’s going from here. If anybody who tells you they do, they’re fantasizing. They’re guessing. The last time I looked, which was just early this morning, it’s up again today. It was up big yesterday. I certainly wouldn’t have predicted that last Sunday, but I wouldn’t have discounted it. I don’t even know how it’s going to end today, let alone how it’s going to do the rest of the week. That’s an unknowable thing. But what is knowable, as we talked about earlier, is that, over time, the trend is relentlessly going up, and I want to be on that trend.

Robert Leonard  33:38

Also, the thing about making guesses is that if 10 people make guesses, and they all vote in different ways, half of them will be right, and then if you continue to do this forever, ultimately, there will be people that just look very smart. They’ll think that they can guess the market or do whatever they need to to bring in a lot of money from other people, but that’s just not the case right now. Nobody can. Nobody knows where the market’s going. If somebody tells you that they know, then you should probably run the other direction.

JL Collins  34:07

Right? And when people get it right, you know, they confuse great good luck with skill. That’s hubris. Maybe one of the most dangerous things to your investment success is thinking that you’ve actually figured it out. By the way, I say that from experience, it’s a mistake that I made. The analogy I like to draw is Wall Street is large. There are literally thousands of people trying to figure out what the market is going to do, and at any given time, somebody has predicted every possibility. Anything that it could possibly do, someone has predicted. Therefore, someone or some collection of people is going to be right. It doesn’t mean that they had a skill in predicting that. It just means that somebody had to be right.

If you look at the lottery, if you look at Powerball, if you Robert, won Powerball this week, you’re not going to run around, I hope, saying “I figured out how to pick winning lottery numbers!” Nobody would believe you. If you did, everybody would look at you and say, “Wow, that Robert got really lucky!” If you have enough people buying lottery tickets, somebody is going to hit the winning numbers. But it would be foolish to suggest that somebody had figured out how to pick winning lottery numbers and could repeat it. Nobody does that with a lottery, but people commonly do it with predictions in the stock market.

Robert Leonard  35:29

Yeah, I forget where I heard it, or what book I read it in. It might have been A Random Walk Down Wall Street, but I could be wrong. I might butcher the analogy a little bit, but there was a story that I once read where there was a money manager who had two sets of note cards that he would mail out to potential clients. On one card, he’d put one thing. On another card, he’d put the other. He would just send them over and over and over for a week or a couple of weeks straight. Although it’s a very small percentage that some of those people would get the right cards every single day, he would look brilliant, and that would bring him in a ton of money for his fun. Of course, I think that’s a hypothetical example, but it illustrates your point that there are going to be people who get these things right just by luck.

JL Collins  36:09

Well, man, you know, I actually wrote about that very example in a post, titled, You, Too, Can Be Conned. But yeah, that was actually a scam, and the scam unfolded just the way you described it. He got a fairly large mailing list, and picked a very volatile stock, and sent out to half, predicting it would drop, and to the other half, predicting that it would go up. Of course, he was right on one of those because it tended to be volatile, and then he threw away the ones where he was wrong. And for that half, he would make another similar prediction. Again, throw away the half where he was wrong and, and he whittled it down until he had some small, but a not insignificant group of people who’d gotten maybe half a dozen of these from him where he was right every time, and that looked really compelling. It looked like he had magic, and, of course, it was a scam.

Robert Leonard  37:03

One of the things I’ve been most looking forward to talking to you about is why you don’t like dollar-cost averaging. A lot of people part of our Facebook group asked this question when I shared with them that we’d be recording an episode together. Why don’t you like dollar-cost averaging?

JL Collins  37:22

Well, first of all, maybe we again need some definition. I mentioned earlier that bear markets are a gift to young people who are putting money into the market regularly. That is a form of dollar-cost averaging. You don’t have any option but to dollar cost average in that scenario because you’re getting money in periodically in your salary, your income, or earnings. By definition, you have to put it in a little bit of time and that does work in your favor over the decades of up and down.

But when we’re talking about dollar-cost averaging for this purpose, we’re talking about having a lump sum of money. Again, I have a chapter in the book and a post about this for anybody who’s interested in more detail. The question becomes: What if I have a lump sum of money from an inheritance? Or maybe I had an investment property I sold? Wherever it came from, but you suddenly find yourself with a big chunk of money. Do you parcel it into the market over a while a little bit at a time? Or do you put it in this lump sum? It’s in that case that I’m not a fan of dollar-cost averaging because the math favors putting it in a lump sum. The market goes up about 75% of the time and it goes down 25%, and the only time you are advantaged by dollar-cost averaging is if the market goes down.

Clearly, somebody who had a lump sum of money in January of this year, if they had decided to dollar cost average because of the bear market, they would be better off. But it’s important to understand that bear markets are fairly rare that, in the vast majority of the time, in fact, statistically 75% of the time, the market goes up from any given point. By dollar-cost averaging, you are simply buying those shares at, steadily, more and more expensive levels.

The second thing is that dollar-cost averaging really doesn’t accomplish the goal that people embrace it for. That goal is, “I don’t want to put a bunch of money in, and then suddenly have a bear market snap its jaws on me.” And again, for our hypothetical investor, in January, that’s exactly what would have happened to them. That would be a bad thing, but of course, over time, it really doesn’t matter because the market comes back. Let’s take an investor who didn’t do it in January of this year. Let’s suppose he did it in January of last year, initially with $125,000, and said, “I’m going to dollar cost average it in over the next 12 months. I’m going to put $10,000 a month is because I don’t want to be caught in the bear trap.” So, he did that, and the market last year did nothing but go up. So every month, he’s getting fewer shares for his $10,000, and finally, this January, it’s done, and the bear comes along, so he got caught in the bear trap anyway. It didn’t protect him from that. That’s another reason why I don’t like it.

Mathematically, 75% of the time, he would have been better off investing in a lump sum. Even if he’d dollar cost average, he won’t accomplish the goal of avoiding the bear trap that he set out to accomplish. He’s not guaranteed to do that. It would take extraordinarily good timing for that to be accomplished. Now, a person doing it this January would have benefited from that extraordinarily good timing, but that’s luck and nothing more.

Robert Leonard  40:57

So with so many different choices these days, I see a lot of new investors getting overwhelmed with choosing an investment firm or brokerage to invest with. I think that it’s important to get the right brokerage, but it’s a relatively small thing, and people get really hung up on it, so I want to hear from you. Which brokerage do you recommend? Why do you think it’s superior to the competition?

JL Collins  41:20

So first of all, I do agree with you that it’s a relatively small thing as long as you’re with a reputable firm. A much more important thing, in my opinion, is to focus on broad-based index funds, like Total Stock Market Index Fund, which is my preference, and S&P 500 Fund, which is almost as broad and perfectly serviceable. That’s where people’s focus should be, rather than whether they’re at Fidelity or someplace else.

My personal preference is Vanguard, and the reason for that is it’s structured differently than every other investment firm out there in the sense that it is owned by its investors. If you think of Apple, this is true of almost every company out there: companies serve two masters. They serve their customers, and they serve their owners. Apple puts out computers and other devices, and their objective is to sell as many as they can or as much money as they can. Now to do that, they tried to provide the best possible product for their customers at a good price point. But they are always going to be looking to sell those products as high a price as possible because that brings in more revenue and more profit for their shareholders and owners. Make no mistake, in every company, the most important stakeholders are the owners.

So, Apple is first and foremost trying to enrich its shareholders. It does that if it’s a good quality company, and I think Apple is by trying to provide good products at a good price for its customers. But it’s always trying to get the most money it can for those products. It’s the same thing in the investment world.

I’ll use Fidelity as an example. I don’t mean to pick it, in particular, because this holds true of every other investment firm, other than Vanguard, which has two masters. Fidelity has the Johnson family, as it is privately-owned, who own the shares, and any other shareholders they have, and fidelity’s main objective is to provide the best possible return to those shareholders. It does that by trying to provide good products at a good value to their customers. Make no mistake, Fidelity’s objective is always going to be to charge the maximum fees they can get away with. T. Rowe Price is a publicly-traded investment firm is similar, only that their owners happen to be public shareholders.

Vanguard is owned by its shareholders, that’s the way Jack Bogle designed it. There is an entirely different motivation behind Vanguard. There’s no point in trying to maximize return to shareholders because it’s the same people who own the funds. So Vanguard’s core mission and one of Vanguard’s core values is to continually drive down costs in their funds. That’s just a core mission. Every other investment firm does that only to be competitive, but for Vanguard, it’s a core value. They can afford for it to be a core value because their owners, their shareholders, are identical with the people who own the funds that pay the expenses. There’d be no point in raising those expenses to provide more profit to those owners. That would just make it a taxable event. So, the difference is Vanguard is always motivated to drive down costs. And costs matter critically to investors, so that’s why I’m at Vanguard. But again, make no mistake. A total stock market index fund is a total stock market index fund no matter what investment firm you buy it from.

Robert Leonard  44:57

Let’s just take Fidelity and Vanguard as examples, as those are my two favorites. If we look at a total stock market fund, does it matter from a fee perspective or a cost perspective if those two funds have the exact same expense ratio? Is there something else that we need to consider? Is it really just that expense ratio number?

JL Collins  45:15

You know, you can get deep in the weeds as to exactly what index the fund tracks and what have you, but for our purpose and the purpose of our listeners, no. Index fund fundamentally is an index fund.

A question I get a lot, “JL, I’m looking at my 401-k. I can’t buy the VTSAX, but I do have this total stock market fund from fidelity. Is that okay?” Absolutely. That’s okay. That’s not a bad choice at all. Some people prefer Fidelity. Fidelity is a fine organization. Some people prefer it because they like the service. Fidelity has come out with index funds that have no expense ratio at all, which is a marketing move. It’s one that I don’t approve of because that’s simply shifting the cost of those funds onto the shoulders of their other fundholders, so I have a little bit of an ethical issue with that. But in terms of the people on that fund, they’re getting a free ride so  I wouldn’t go to Fidelity for it. I wouldn’t change, but an index fund is an index fund.

Robert Leonard  46:21

We’ve talked about how your favorite fund is the Vanguard Total Stock Market Index Fund (VTSAX). Why do you prefer that over a broad-based low-cost, even Vanguard S&P 500 fund, like say, VOO or VFINX?

JL Collins  46:40

My preference is very slight. Let’s make that point first. Jack Bogle, himself, owned the S&P 500 Index Fund. That was the very first index fund he created, which is probably why he owned it as I’m sure he owned it from the beginning, and just kept adding to it. The reason I like VTSAX is it just that it’s much broader. It includes small companies and mid-sized companies, small-cap, mid-cap companies. I like having that little bit of extra. Now to be clear about it, and I’m probably going to have these percentages a little off, but 80% of VTSAX is made up of the S&P 500. They’re very, very close. The amount of small and mid-cap stocks you have is relatively small in the fund. That’s why they’re so equivalent. In fact, if you track up a chart of their performance over 10-20 years, it’s remarkable how closely they track each other. 20 years from now, one of them will have slightly outperform the other. I would guess that it’s going to be VTSAX simply because small-cap and mid-cap are kind of like adding spice to the stew. But that depends on what’s in favor over the next 20 years, whether it’s large companies or smaller companies. But either one of them, for our purposes of long-term investing, is just fine.

Robert Leonard  48:02

We’ve been talking about these different funds and ETFs. We talked about the Vanguard Total Stock Market Index Fund, which is the mutual fund VTSAX, but they also have an ETF that tracks it. What is the difference between the two?

JL Collins  48:18

An ETF stands for Exchange-Traded Fund, and VTOI is Vanguard’s exchange-traded fund that holds the total stock market index portfolio. Listeners need to realize that whether you own VTSAX, or you own VTI, you own precisely the same portfolio. It really doesn’t matter for our purposes, which one you own. That’s a question I get a lot. That’s true of all or most funds. Most of them now have an ETF version. Whether you buy the ETF or you buy the fund, you’re owning the same portfolio. I don’t think we want to go into the weeds as to what the differences are exactly between ETFs because they’re pretty subtle. Why they were invented has a lot to do with making them more easily tradable, but for our purposes, as long-term investors, they are essentially the same vehicle. The truth is, at the moment, for whatever reason VTI as a slightly lower expense ratio than VTSAX. I’m always talking VTSAX because that’s just what I’ve invested in over the decades, but when people ask me, “Is VTI okay?” My answer is, “Not only is it okay at the moment, but it’s probably slightly better.” It really doesn’t matter.

Robert Leonard  49:33

I think one of the things that differs the two is the type of account that you’re using. I know if you’re investing through a 401-K, a lot of times, you can only invest in mutual funds. You can’t invest in ETFs. Whereas if you’re investing outside of a 401-K, you have the option to go either the mutual fund route or the ETF route. That could be a dynamic that’s at play for the listeners.

JL Collins  49:52

Yeah, that’s the thing with 401-Ks. 401-K plans are limited to whatever investment choices they happen to put forth. As you said, usually you’re going to be choosing funds in your 401-K, but that gets into what we talked about a moment ago. A lot of 401-Ks don’t carry Vanguard funds. They don’t carry VTSAX nor Vanguard’s S&P 500. But they might carry it from Fidelity or some other company. Again, those are fine. But those are the nuances and some of the limitations of 401-K’s.

Robert Leonard  50:26

I’m a big proponent of Vanguard, too, like I said a few minutes ago. I recently started a new full-time job about a year ago, and I was very excited to see that their 401-K is through Vanguard, so I’m able to take advantage of those funds, which is great. But I want to talk about: Why does the investment world seem so complex? Why do people make it seem so complex when it can be made simple, and people can still earn great results?

JL Collins  50:52

Because the investment world isn’t designed to help investors earn great results. It’s designed to line the pockets of the people in the investment world. Make no mistake that Wall Street is always creating new and complex products because the more complex it is, the more, in the way of fees, they can charge. The more confusing they can make it, the more likely they are to convince people that, “Oh, this is way above your pretty little head. Let us take care of it for you.” And of course, they charge high fees for that. So, it’s in the investment world’s best interest to make things as opaque and complex and confusing as possible, so that they can charge the highest fees possible, and have us driven into their open arms.

The analogy I use is: Imagine you had a huge dining room table, and it was filled with all kinds of exotic delicacies that you couldn’t even begin to decipher what was in them or how to make them. In one tiny corner, this table had the basic fundamental nutritious kinds of foods that your body really needs, that’s really healthy for you. You have all this exotic stuff that may or may not be healthy for you and probably have things that are not. You could put your arm on that table and sweep all that stuff on the floor because all you really need and all you really want are those simple, basic things. In our analogy, those simple basic things are broad-based index funds, and everything else is all these exotic products that Wall Street has come up with.

It was kind of legendary that in the ’08 crash, with all the kinds of derivatives and things that Wall Street had created, the people who created them didn’t understand them. They were so complex. So that’s the bad news. The good news for us is that we don’t need it. Wall Street, as far as I’m concerned, can continue to do whatever it wants to do. It doesn’t affect me as a long-term investor at all as long as I have my low-cost index funds. That’s all I need. That’s all I care about. That’s what makes this so simple for people like my daughter who really don’t want to get into the weeds. They don’t have to. Just like people who don’t really want to get in the weeds on exotic foods, you can have a very nutritious diet just sticking to very basic, simple, quality kinds of foods.

Robert Leonard  53:15

Yeah, I agree with your entire philosophy. I think for people that don’t want to dive into the weeds, I think it’s a great way to invest. But how about the people that do want to dive into the weeds? A lot of people that listen to the show love stock investing. They’re like you and I. They’re very passionate about it. A lot of people like to pick individual stocks. Do you think there’s room in someone’s portfolio to do some stock picking, as well as index fund investing or ETF investing?

JL Collins  53:43

People are free to do whatever they want to do. I wrote a post probably two or three years ago now in response to this, and the title of the post is: Too hot. Too cold. Not pure enough. My readership has made up for broadly speaking of two groups of people, like my daughter who just want to understand the basics so they can get things right and go on with their lives, and those people who are really into investing. Some people tell me, “JL, you’re way too aggressive being in all stocks. Being heavily tilted towards stocks is way too aggressive.” And then others are saying, “Oh, no, you’re way too conservative. If you did this, and you tinkered with it this way, and you added more small-cap stocks, …” That’s why I titled it that way.

I obviously think that my approach is the best approach. If I didn’t, I’d be talking about some other approach. I think a broad-based index fund will serve my needs. It’ll serve my daughter’s needs. This is one of my dirty little secrets. I actually achieved financial independence in 1989 before I embraced indexing. I achieved by picking individual stocks and picking actively-managed mutual funds that were run by people who were picking individual stocks. That’s an important distinction, I think because it’s not like picking individual stocks can’t work. It’s not like inactively managed funds never produce a return. They do. The thing is that their returns, by and large, are not as powerful as the index. The research backs that up, and it takes a lot more time and effort and works to get them. It took me a lot more time and effort to work, too. If you’re an active manager, by definition, it’s going to. I would have been far better off if I embraced indexing early because I would have gotten a better result for less effort.

But I understand the appeal of picking individual stocks. There are a few things more intoxicating than researching a company, picking a stock, and watching it go up. It goes back through to our thing about hubris. If you’ve done all your research and it turns out that you’re right and the stock is going up, be a little bit cautious because it might not be just that you’re that person. It might be that you just got a little bit lucky. It might be that you were clever, but if you do long-term investing enough, you’ll have enough times where you get it wrong, then you’ll probably have humility beaten into you even if, overall, you make money. And I had both. I had humility beaten into me, but I made money at the same time.

I do kind of object or discourage is this idea of, “I’m going to put the bulk of my money in index funds because I know that’s the best thing to do, and then I’m going to keep 5-10% and play and have fun with investing in individual stocks.” It depends on your motivation, I guess. If you think that maybe in that 5% or 10%, you’ve got a pretty good chance to pick the next Amazon or the next Google then, okay. If you’re really doing it to play. I wouldn’t suggest investing as that’s not recreation, that’s money. I don’t invest to play, I invest to make money. Also, if I thought I could outperform the index with any kind of reliability, I wouldn’t just be taking 10% of my money and putting it in stocks. I would be buying socks. The idea of having play money just doesn’t sit particularly well with me, but I’m not anybody’s mother, so they can do whatever they want to do.

Robert Leonard  57:13

So is that idea, a potentially bad one because of how the money is defined or earmarked? Because, as you said, if it’s play money, that might not be a good thing. But if you’re doing portfolio allocation because that’s just how you want to build your portfolio, is that necessarily a bad thing? So, like for me, I started 100% with just picking stocks, then I found your book, and I found some others. Rick Ferri is the head of Boglehead Investing. He’s very into the same style of investing, so I decided to put about 50% of my portfolio in just index funds, and let it do its thing. But I’m very passionate about individual stocks as well. I have the time. I don’t look at that as play money. I look at that as very real money that I want to invest, but it’s just something that I like to do. I see it as a real investment. I’m trying to make money with it, not as “play money.” So is it that dynamic? Is it how you find the money? Or is it just overall not really a great idea, in your opinion?

JL Collins  58:06

I think both. I think it’s how you define the money, so I think the way you’re defining it, and the way you’re doing it is better, in my opinion than people who are saying, “I just want to play with it.” But the research is pretty clear. It is very, very difficult to outperform the market by picking individual stocks. You might be the exception, but you are probably setting yourself, over time, to underperform.

One of the things that I think could be dangerous, and it sounds like you might fall into this category, Robert, are people who like to tinker with it. They like to engage with it. My daughter doesn’t, and I guess that over 20 years, she will outperform you from her benign neglect because she’s not going to be tempted to tinker with it. I think people who are tempted to tinker with it have chosen a much harder road, and probably a less profitable one. On the other hand, I’ve been where you are, so I understand. When I hear the arguments for picking individual stocks, it’s my own voice in my head that I hear because I  made those arguments for decades, literally, so I get it. It is great fun, and it’s a great education for the companies and how they work. So, if you want to do it, and you understand the risks, then, again, that’s your call, but I learned not to do it.

Robert Leonard  59:30

It’s funny you say that because I agree with everything you just said. It was almost like ignorance was bliss for me because I didn’t know a lot about index investing. I was just picking individual stocks because that was really all I knew. I didn’t know any better. I don’t want to say it was easy to pick stocks that were going to outperform, but it was easy for me to decide to pick individual stocks.

Now that I’ve studied it a lot more, both from Boglehead Investing, as well as your book, and a lot of the stuff that you talk about, it’s a lot harder for me to pick individual stocks because now when I go to do that, rather than just thinking about, “Is this a good investment?” I also think “Will this money actually be better in VTI or VOO rather than in an individual company?” So, I don’t know where my portfolio will end up. Maybe as I get a little bit older, maybe I’ll forget all this stock-picking stuff and just go 100% to index funds. But, even though I know that the data is against me, and your daughter could very well outperform me, it’s right now one of those things that I enjoy learning about. I enjoy doing it, and I think it’ll be an educational experience if it doesn’t end up being prosperous.

JL Collins  60:26

Well, Robert, I give you big props for your awareness of all that, and your analysis of it. In my defense, there was not nearly as much information available in my day. My book, obviously, wasn’t available then. I started investing in 1975, which coincidentally, is the year that Jack Bogle created the first index fund. I didn’t know that at the time, and I would not nearly have been wise enough to embrace it even if I had known. The reason I know I wouldn’t have been wise enough to embrace it is because, in 1985, when I did learn about it, I wasn’t wise enough to embrace it. Unlike you, it sounds like you discovered index funds, and pretty quickly shifted at least part of your portfolio over to it. But it took me 15 years to finally accept the advantages that index funds offered, and so I’m in no position to criticize you or what you’re doing. In fact, I applaud your way of thinking, and I don’t think you’re doing the optimal thing, but I think you’re thinking that through very clearly. That will serve you well, and you’re certainly moving in the right direction much more quickly than I did.

Robert Leonard  61:35

I appreciate that. So, I want to wrap up the show. What is the biggest mistake that you see new investors making, and how can listeners of this show avoid that same mistake?

JL Collins  61:45

Do you mean besides picking individual stocks?

Robert Leonard  61:47

I was going to say you can say picking individual stocks if that is the mistake you see.

JL Collins  61:52

Actually, it’s not. I think the biggest mistake I see, and I kind of see it in bold relief at the moment, in the middle of this bear market, are people try as Warren Buffett warned against, to dance in and out of the market. People think they can time the market. I put up a tweet and put it up on Facebook about a week ago now. And I said, “You know, I’ve noticed there’s a new symptom of COVID-19, clairvoyance. Because everywhere I turn, I’m hearing people say they know what the market is going to do.” And nobody knows what the market is going to do.

There are people on my blog who are debating this very subject. People have said, “I’ve sold, and I know the market is going to keep going down further.” I don’t know what the market’s going to do. When I looked today, it was going up, and it went up dramatically yesterday. I didn’t expect that. But for all I know, when you and I are going to disconnect, and I’m going to look, the market’s down, or maybe it’s even higher. Who knows what the rest of the week is going to be like? Nobody knows. People who say they know are fooling themselves. And if they say they know within trying to persuade people to follow their advice, they’re just trying to fool other people probably for their own benefit.

So, that’s the biggest mistake. It’s having the hubris to think that you or anybody else knows what this market is going to do next because we don’t. Have we hit the bottom of the market? Is it back up from here? Possibly. Is it going to turn around and go back down 50%-60%? Possibly. I have no idea. Neither does anybody else. That’s the biggest mistake I see out there.

Robert Leonard  63:34

So JL, I’ve learned so much from you over the years from all your content and today through this conversation. I know I really, really enjoyed it, so I can only imagine that the audience will, as well. Where can those listening to the show today go to learn more about you and connect with you further?

JL Collins  63:50

The best place to start is on the blog, which is jlcollinsnh.com. I’m also on Facebook and Twitter, so people can seek me out @JLCollinsNH, and you’ll find me there if you care to.

Robert Leonard  64:05

I’ll be sure to put links to the blog, Twitter, and Facebook, and a couple of the other resources that we talked about throughout the show, like the specific blog posts that we talked about. I’ll also put links to some of the funds that we talked about today, so you guys can look into that, as well.

JL, thanks so much for your time. I really appreciate it.

JL Collins  64:23

It’s entirely my pleasure, and thanks for inviting me! I had a lot of fun with you.

Robert Leonard  64:29

Alright, guys, that’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week!

Outro  64:35

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