“The Simple Path to Wealth” is the book by Jim Collins, that compiles and re-organizes everything in his Stock Series posts from the blog he started a few years ago to teach his daughter about finances.
I really want to share what I personally learned, that I hadn’t already known or read elsewhere but, if you haven’t read it, this is the 10,000-mile-high scope of the Simple Path:
No debt, F-you money instead
Absolutely no debt. Debt is “unacceptable”; and “debt should be the exception” and “debt is not normal”. He even hints that readily available credit makes cars and education expensive. I had read the same before about the cost of college and I believe there is some evidence to support that line of thought. More and more often I read or hear that even mortgage debt is not acceptable, one of the reasons homeownership may be falling out of favor in the younger generations.
If not debt then what? Well, the opposite. F-you money, by which he means F***-you money. This is not just the emergency fund that many financial advisors preach so much about. It is money that can buy your freedom whenever you want and not just if you ever need it. I think I first learned of this concept years ago from (then NPR’s) Tess Vigeland, except that she called it “forget-you” money.
Save-a-lot and put it on VTSAX
“No debt” may just happen inadvertently (good luck with that!) but you will have to make “F-you money” happen purposely.
VTSAX is an index fund managed by Vanguard that tries to follow the whole market, so it is a weighted average of all companies in the stock market (weighted on market cap). And, magically, even though it aims for average it beats most other funds and most actively managed funds. The expense ratio is negligible (something like 0.5%) which makes it even more attractive. The only little problem is that the A in VTSAX means it is an “Admiral shares” fund, so there is a higher minimum investment required ($3,000). It even pays a very decent dividend (1.8%).
The inflation and deflation hedges
One would want to protect their investments against inflation and deflation. Stocks are the inflation hedge. In other words, you use stocks to hedge against inflation. The idea is that inflation is the spread rise in prices (or the currency’s loss of purchasing power) and since companies sell products and services, as prices go up then also the company’s value (and stock price) will go up along. Bonds (and cash) are the deflation hedge, then there is deflation prices go down and your cash (and bonds that have a value attached to currency) will gain purchasing power.
And my three takeaways are:
The story of the monk and the minister
Two friends grew up close but then life sent them separate ways, one became a humble monk the other an important minister.
Adults, they met and after talking for a while about their lives the rich minister tells the poor monk:
“If you could learn to cater to the king, you wouldn’t have to live on rice and beans”
To what the monk replies:
“If you could live on rice and beans, you wouldn’t have to cater to the king”
I have nothing against kings nor ministers but I feel closer to the monk, though I am not one. Which one would you rather be like?
The beauty of Vanguard
Vanguard’s Jack Boggle supposedly invented index funds, and index funds are simple and cheap and usually give a pretty good return with lower risk and virtually no effort. But that is not all.
The great advantage of Vanguard is that it is not a private company, nor even a public company, but it is actually owned by the funds it operates. So by owning a fund you actually own Vanguard. This was a total revelation to me when I learned about it in the blog. I liken it to banking at a credit union (and not at a bank) in which you are a member and not a customer. Vanguard will always put your interests and needs first, because if you have your money at Vanguard, then Vanguard is you.
On the hedges
Bonds and stocks being deflation and inflation hedges were something I had never heard about, and I have some personal insight to add:
Deflation is a lot less likely than inflation (historically speaking), it is a lot more difficult to fight than inflation (ask Japan) and it seems to be a much bigger concern for the macro economy (the country) than for the micro (individuals). Inflation is much more likely (there is always some), the Fed and central banks and governments, in general, are used to dealing with it (tweaking it and even managing it) and using it as an undercover tax or to push consumption, so I see it more of a threat for the people than for the government. This means that I should worry more about inflation than deflation. So I will hold more stocks than bonds (I don’t do bonds, really, but will hold some little cash).
So, have you read the book? the stock series in the blog? What did you learn?
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