AMA | JL Collins and The Simple Path to Wealth

We are live on Facebook like TV producers now.

Feels like the moon launch.

All right, welcome, everyone. We're really excited to have everyone here for our ama. These are always a lot of fun and we have a really great guest, J.L. collins, tonight. Usually we like to get started. Steve Chen, the founder of New Retirement, is going to kick us off and doing some introductions and then we're going to just briefly talk about some stuff that's new at New Retirement. And then we will do a little Q and A with JL I have a couple questions prepared for him. And then we're going to do something a little bit different today. Instead of going with questions that people asked in advance, we're going to open things up for live questions a little bit sooner. And I am sure that everybody will have questions to take us through the hour. So with that, I'm going to turn things over to Steve to talk a little bit about New Retirement.

Awesome. Thanks, Michelle, for emceeing and J.L. thanks for time. It's great to have you join our community and be part of this group. And I know we have a lot of folks with a lot of questions. You're a very popular guest here.

The invitation.

Yeah. So just real quick on New Retirement and what's happening. I think, you know, we're essentially building the TurboTax for planning and we're, we're definitely making a lot of progress. We're starting to get, I think, more and more recognition from the larger world. We'll talk about that in another slide. I think more and more users are getting it and, you know, we feel good about kind of how we're building this business, which is really around delivering tools, content, and a community where people can get clear, unbiased answers from a community of folks that are going through the same process stuff in the product. So we released labels. Yay. You can finally write down what your expenses were and kind of label different things with your own stuff. And we're going to be adding that in more and more parts of the site. So that's, that's there. That was a big requested feature. We rolled out the Roth Explorer in beta. So we had Roth modeling capabilities before where users could, you know, enter hey, I want to take from this account and I want to do a Roth conversion this year for this much money. And then we do the, you know, the forecasting forward, how you know your returns will look and what your account balances will be and what the tax impact will be. So that was manual. Now we've added the ability where the system will look forward, look for lower income years and solve for optimal, quote, unquote, optimal growth, conversions, events and communities. There's more stuff going on. Facebook group is over 2,000 people now. Michelle's doing office hours once or twice a week. We're doing these AMAs once a month. So there's a page on our site out there where you can sign up for the stuff. And office hours are free, you know, AMAs are free.

So.

So these are all places that you come to ask modeling questions, learn how to use the tool, make sure that your plan is accurate, and learn how to make the most out of all the features that we have. Because there are a lot of, lot of ways to manage your plan and model different scenarios.

Just, you know, which is along the lines of what we're talking here with jail, which is like, how can you do this in a super simple, low cost way, low fees, very simple portfolios, and maximize, from a mathematical perspective, your chance of achieving your goals and kind of cut through all the noise that's out there. All right, I think that's it for me.

So I think without further ado, we'll get into the main event here. Most of you may know J.L. collins. He is an author and a blogger, very popular in investing and the financial independence community. I think he first started by just writing letters to his daughter with the intent of sharing his own experience and teaching her how to build wealth. And as soon as he opened that up to friends and the public, things really started taking off. And it's because investing and managing money can feel very complicated and overwhelming. But focusing on simplicity has really made it accessible to people who are number crunchers, like a lot of the folks who use new retirement, but also for people who don't want to spend all their time crunching numbers. They don't want to spend all their time thinking about retirement. They want to be pursuing their passions. And, you know, that's somewhere where we're right in line with him is that we're trying to make planning money very easy and accessible to everyone, not just people who make this their passion. So very exciting to have you as a guest and welcome.

Well, thank you so much for inviting me. I'm excited to be here and greetings to everybody who showed up.

Yeah. So we have a couple questions to just get to know you and refamiliarize ourselves with some of the thoughts that you share in your book and through your blog. And one of the things that we talk about a lot or you talk about A lot is simplicity and how there is a simple path to wealth. So can you just talk a little bit about what that simple path means or how you define that?

Yeah, ironically, I have a book and a blog describing the simple path. But I think in a nutshell, it's three things. It's avoid debt, live on less than you earn and invest that surplus. And on the investing side, which is where I spend most of my time talking, means investing in low cost, broad based index funds. And I'm sure we'll talk a little more about that.

Yeah. So simple but not necessarily easy.

Well, you know, absolutely simple and also easy to execute. The discipline to actually live on less than you make is probably not easy. But I tell people when it comes to that, the best way to think about it is not that you're taking money away from your savings to go into this investing and you're driving yourself, but rather it's just a different way of spending your money. I've said I've spent every dime I've ever made. The difference is I've spent a lot of those dimes buying my freedom. How do you buy your freedom? You buy investments that ultimately are throwing off enough money to support you and you don't have to at that point trade your labor for money.

Makes sense. The next thing I wanted to ask you if you, if you guys are familiar with JL's blog, he has a manifesto and on a page he has all these kind of life sayings and rules of thumbnail that are very anecdotal and lots of things like do this simply and you'll wind up rich or spend sparingly. So out of all the things that you have in terms of savings on your manifesto, what is your favorite saying or what do you think is most important?

Well, so my favorite thing on the manifesto is probably the one thing that I didn't write. And that's a quote that I open it with from Leo Burnett. And it's something to the effect of if you reach for a star, you might not get one, but you won't come up with a handful of mud either. And that's struck me profoundly the first time I heard it. And ever since it's been the way I've tried to live my life reaching for that star. Candidly, I've never gotten the star per se, but life's been pretty good. As he says, you don't come up with a handful of mud. And an extension of that is the moment you start saving and investing towards your ultimate financial independence, you're on that path. You're not grabbing mud. You don't have the star yet. And every step you take makes you a little bit stronger. Of the things that I actually wrote and put on there, I think my favorite's probably the very last one. And I put it last to kind of end the manifesto. And I'm not going to quote it exactly, I suppose, but it's something the extent of read, because if you read, there's nothing you can't learn and there's no place in the world you can't go. Or in the universe, for that matter, you can't go.

That's great. Steve, did you want to share your favorite saying on the site?

Well, I found a favorite because after you asked about this. Yeah. You know what's interesting is I remember when I first heard the term FU money. I mean, I was probably like right out of college, and that resonated with me. So this is. I saw this term before you had it, you know, before I saw it on your blog. But I think that concept really struck me that, like, you definitely need to kind of build up a pool of capital so that you can have a degree of freedom. And the larger the pool, the more freedom you have to make your own decisions and to take your own risks. And, like, you know, for me, it's like, enabled me to, you know, do businesses like this. Like, hey, listen, we think there's something interesting here. Let's go after it. If you have the capital together, you can, you can make these decisions. And I know with jl, like when we're on the podcast together, you shared a lot of stories about how you. Different points in your career, you know, made decisions that confounded your co workers. But, yeah, the fu, you know, term definitely resonates.

Yeah, I didn't. I agree with you. I think it's a. When I first came across it, and I came across it in the early seventies in a novel by James Covell, Noble House. And there's a character in his novel, and her stated goal is to achieve FU money. And in my mind, FU money is that intermediate step from when you first begin until you reach financial independence. Financial independence being when you have enough that you don't have to work unless you want to. FU money simply means that you are in an ever stronger position to make bolder decisions in your life. At least that's how I think of it.

Perfect. Which led into our next question quite beautifully, which is what is a bold choice that you've made yourself? Having a stash of FU Money.

Well, I suppose the biggest thing throughout my life, early retirement, was never my goal. In fact, I had never actually come across the term until after I started my blog in 2011. I liked my career. I just didn't like it doing it all the time. And so what having FU money allowed me to do was to step away from it periodically and take sabbaticals. They would last anywhere from a few months. I think the longest was five years. And that allowed me to do other things besides my career work and recharge my batteries. And that, for me at least, made for a more fulfilling life. And the first time I did that, which I suppose would be the first bold choice, because after that, the choices didn't feel that bold. But I was still in my twenties, and I'd saved the princely sum of $5,000, and I'd taken a couple years after college to find my first professional job. It was a tough economic time in the early 70s, and it was a job I liked. I didn't want to give it up, but I also wanted to spend a year traveling in Europe. And I wrestled with that, wrestled with it, and finally decided, well, maybe if I could get these guys to agree to let me go for a sabbatical for, like, four months, that would scratch my travel itch. And I went to my then boss and asked for that, and of course he said no. And I was young. I didn't realize things were negotiable. So I thought, okay, that's the end of that. I went back and thought this through and thought, well, you know, do I want to go to Europe or do I want to keep this job I like? And I ultimately decided that I could get another job. And so I went back and I quit. And suddenly I learned that things were negotiable. So that was the first bold move.

Very good. You know, we took the poll at the very beginning, and there's quite a few people who are near retirement, almost 40% of the audience tonight. So how, when you're thinking about investing, how do you determine when you have enough to retire? Or how did you determine that?

Well, I. You know, it's interesting because some of these concepts, again, didn't come into my orbit until after I started the blog. Right now, the answer to that question would be, I use the 4% rule. I prefer to call it a guideline because the rule has implications that I'm not comfortable with. But that simply suggests that if whatever amount of money you have, if 4% of that is enough for you to live on a year, live on for a year, then you have enough money that you no longer need to trade your labor for money. You no longer have to work in that sense. The other way to look at that, by the way, is if you have 25 times your annual expense. So in case I've confused people, which is very possible, what that means is if you have a million dollars, well, 4% of a million dollars is $40,000. If you can live on $40,000 a year, you are financially independent, you're able to retire. If you need $60,000 a year, then by using that 4% guideline, you are not. So it's not a fixed amount of money, it's rather a formula. And of course, if you take 40,000 and you multiply it by 25, you get a million dollars. So that's looking at the other direction. So all you need to do is know how much you need or want in retirement, multiply that by 25, and you know what the magic number is.

For you, and then, hey, jail, how do you, for yourself and I guess for other folks, how do you see, how do you think about portfolio allocation as you lead into and then transition into retirement?

So that's a pretty big question, Stephen. I think of, and a lot of the people I write for are interested in retiring early, so they're young people. So I don't think of retirement anymore in the classic sense of retiring when you're 55, 60, 65 or whatever. I think of it more as the period of time when you're building your wealth and the period of time when you're living on that wealth and of course you're trying to conserve it. And for a lot of the younger people that read my stuff, they may go in and out of those phases several times during their life. So the difference between them is when you're working and you have earned income flowing in and you are saving a large percentage of that income because that's part of the formula for achieving wealth. You have that cash flow that is going into your investments every month or every couple weeks or whatever. And that allows you to ignore the volatility of the market because you take advantage of it and it allows you to build your wealth. And for those years, I recommend being 100% in stocks and specifically in a broad based index fund. The one I favor is VTSAX Total Stock Market Index Fund from Vanguard. That's what I have my daughter in, for instance. She's 28, she's working the only investment she has. And she adds to that Every month, when you start living on your portfolio and you no longer have the cash from a job or whatever work activity you had, you want something else to replace that cash flow in order to smooth the ride. And in my world, that's when you add bonds. Because bonds have a tendency to smooth the ride. And depending on how you feel about volatility, is what determines what percent of bonds you ought to have. There are a couple of caveats with that. One is you need to understand that the greater percentage of bonds you have, the lower your returns will be because bonds are a drag over time on returns. Stocks are the power engine and building your returns. On the other hand, the more stocks you have, the more volatile, the rockier the ride will be. And every individual has to decide for themselves what that balance is. Another caveat I would throw out there, by the way, is when you look at the Trinity study, which is where I'm drawing that 4% guideline idea from, and it looked at a lot of different allocations of stocks and bonds. If you have less than 50% stocks over time, that 4% rule doesn't work because you don't have enough growth in your portfolio. So if you want to follow the kind of approach I use, you want to make sure you have enough growth, your growth engine is powerful enough. But within that caveat, it's then a matter of how much you value growing your portfolio over having a smooth ride.

Great. Yeah. And I imagine there will be a lot of follow up questions on this topic, judging from some of the pre questions that we got. And then lastly, you know, we are just kicking off 2021. A lot of people are thinking about their finances. A lot of people are taking stock and developing a plan for this coming year. What is the best piece of investment advice or just advice for 2021 as we start planning?

Well, it would be the same advice I would have given at the beginning of 2020 or 2019 or 2018, and that I'm going to give for 2022 and that's to stay the course. My investment approach does not try to predict what the world's going to do or the market's going to do at any given point in time. Nobody can do that successfully. What we do know is that over time the market relentlessly goes up, always have, and it will continue to go up as long as, and I'm talking about the United States market at the moment. As long as the United States is a viable country and economic entity, then the stock market, no matter what happens, will always recover. Last year was a great example. We, of course, had Covid hit. And along with COVID in February and March, the market took a dive of about 32%. And I had lots of people on my Twitter feed and on my blog saying, you know, Jim, I know you say to just ride out the storms and that it always comes back, but this time it's different. This time it's a pandemic. Well, it's not different. I mean, it is different in the. It's a pandemic as opposed to the crisis we had in 2008. It's different in the, tragically, people are dying from it, but in terms of how the market acts, it's not different at all. Now, I didn't know that 32% was the bottom. In fact, my guess at the time would have been it was going to go lower. I didn't know that it was going to turn around as fast and as hard as it did. I don't think anybody was predicting that. But what I did know is it wasn't the end of the investing world. And my advice was to just hold on and keep adding money to the pot, take advantage of the lower prices and stay the course. So that's my advice for 2021. We have no idea what this year is going to bring, but since we can't predict it, then we just ride, you know, we ride the waves.

Yeah, that's great. That makes a lot of sense. I like to follow that advice. Not to everybody, it doesn't, but buy and hold investor. All right, well, those are the questions that we had in advance. I want to switch over to invite the audience to ask questions themselves. There's a couple different ways that we can do it. There is a Q and A on Zoom where you can write in a question. This is a little bit interactive, so if you are participating and want to read the questions, you can vote the questions up and I will see them faster in order to ask. So that is one way I also see that somebody is raising their hand to ask a question. So we'll take that live question first. Certainly. Also raise your hand to ask questions. So, Guy, I'm going to let you talk and ask your question.

Can you hear me?

Yep.

Yes, I hear you, guy.

Cool.

Hi, Jim. First of all, thank you for your blog and writing your book. I'm talking from the UK by the way. Almost midnight here. Your book has helped me, me, my family and lots of friends. So thank you first of all.

Oh, I'm so pleased to hear it. Thank you for Sharing that.

Thank you. My question is you talked about bonds to smooth the ride because they're less correlated with stocks. I wanted to get your opinion about doing the same smoothing the ride with rental properties. That will still get you steady cash flow but usually a bit of better yield. Just to get your opinion on that.

You know that's. Guy, that's a great question. And it applies not only to rental properties, but things like Social Security, which is what our retirement, our federal retirement system in the United States is called, things like a pension if you have it from a company you've worked for. So yeah, there are other things besides bonds that can smooth the ride and if you, if you have them. And rental real estate can be one of those things. I get asked about rental real estate a lot and my opinion on it is it can be a great way to build wealth. But if you're comparing it to investing in index funds, you have to be, you have to understand, I think that you're comparing apples and oranges because real estate is a hybrid. It's an investment and it's a part time job. And even if you get property managers and what have you, you still have to manage the managers. So you're really, if you're going to invest in real estate, it should absolutely outperform your index fund because you're investing not only your money but you're investing your time. And so you're really comparing doing that to investing in the index fund and what else you would do with that time, whether you'd spend it with your family or part time job or building your career or whatever that might be. So I think that's the right mind frame and comparing the two. But sure, it can take the place of bonds. It's a different kind of animal.

So you're saying it can take, but it's less passive because you need to do more work.

Yes, thank you. Thanks for the question.

Next up, we have Karen. So Karen, do you want to ask your question?

Great, thanks Michelle And JL I just want you to know that my husband and I are such fans of your book that we have the printed version and the audio version.

That's awesome. I hope you have one of each for yourself and your husband has one of each for himself.

That's correct. He likes audio better and I like reading better and I like the charts and the printed.

You should both have one of each is what I'm trying to say.

Oh, okay. Okay, I'll think about that. Well, my question is about converting traditional IRAs to Roth IRAs we are taking a hard look at that. And what are your thoughts on it and what are some tools that we can use to figure this out and from a tax perspective and all that sort of thing?

Yeah, it's a tricky thing, and I'm kind of candidly, Karen, out of touch with the process myself. I think it's well worth doing what you basically what you're doing. If you are shifting money from a traditional IRA into a Roth, what you need to understand is that's a taxable event. That is to say that the money you take out of your traditional will be part of your taxable income in the year that you do that. So what you need to look at closely is what is your income otherwise in a given year? Look at the deductions you might have the standard you mentioned you're married. The standard deduction is like 24,000 or something. So look at the income that you have, the deductions you have, figure out what tax bracket that puts you in and then look at how much you're going to pay in taxes for whatever you move into that Roth. So if you're in a 25% tax bracket, the question you have to ask yourself is, is it worth taking that 25% hit on moving this money into the Roth? The other thing you can do is you can say, well, okay, I'm in the 25% bracket, maybe I'm just barely in it. Yes, that is worth it to me. And you can calculate how much you can move before you push yourself into the next higher bracket. But that's really the equation you're looking at, is how much tax you're going to have to pay on that conversion. Ideally, people who retire early retire from a job and their income goes to zero. At least their earned income goes to zero. So suddenly they're in a very, very low tax bracket. And that's when doing these conversions is ideal. Does that make sense?

Yes, it does. And I know the tax codes might be changing in, what is it, 2025 or 2026 with the different tax brackets. So. But like I said, and I'm also looking for some tools that we can use to help us with this project.

Yeah, I'm not aware of any tools offhand. And you're right, I think the current tax law expires at some point. But Congress can always change the tax laws. And that's one of the reasons that it's attractive to get money into a Roth because. And of course, they can always change your Roth, too, but that would be A very politically difficult thing to do. So, you know, once money's in a Roth, it is now beyond the. And I'm hesitating because, again, it can always be changed. But as lost now, it's beyond the reach of the tax man, and it grows, and you can take it out tax free.

But the very beginning of this presentation, Steve showed the new Roth Explorer. So that's one tool within New Retirement Planner plus that allows you to kind of run scenarios and have a strategy generated for you within the Planner plus tool. You can also manually create your own scenario for different Roth strategies and play around with. Once you put your plan information and see how it impacts your tax bracket and kind of visually be able to look for those. I call them Tax Windows or Tax Opportunities, where Roth conversion may make sense. So you can definitely use the new retirement tool to explore this concept in more detail.

Well, there you go.

Yeah. Karen, if you need help, you can message us through the app or. And we are also holding office hours on this stuff. We're thinking about creating a course on it, but we can give you the support to kind of talk through the strategy and explain how it works.

Great.

Thank you.

Thanks for your question.

Thanks for your question. All right, Rhodian, hopefully I pronounced that correctly. You're up next, and then we'll take some of the questions that are written down.

Okay.

Hi. Okay, I'm sorry, I don't know if you can hear me or not, so I just want to say jail. First of all, I love your blog. I love your book and everything. And Steve, I'm actually glad to follow you guys. The question I did have, and it was actually answered in public chat and everything, what do you recommend? VTI or vo or do you recommend having both? That's my main question because I already have it both in my investment account and I have it as well in my Roth ira. But I was just considering try both or should I just stick to one?

Pretty much.

So VTi, I know, is the ETF version of VTSAX, and Voo is the S&P500. Am I correct? In my memory.

Yes.

Okay, so your question is really, do you want a Total Stock Market index fund or do you want an index 500 index fund? I prefer and recommend the Total Stock Market Index Fund because it owns every, virtually every publicly traded index company in the United States. And I like having that breadth. Now, having said that, because these things are cap weighted, there's a very close correlation between the Total Stock Market Index Fund and the S&P 500 fund. I want to say that the stocks that make up The S&P 500 make up about 80% of VTS X. So if you look at a, if you chart these things right and if you look at performance over the last 20 years or whatever, they track very, very closely to each other. If you look out 10 years from now, one will have slightly outperformed the other, but it's a coin toss as to which that one will be. I don't think you need both because you're kind of repeating yourself, but either one will serve your needs well. I get this question a lot from people who say, I know you recommend VTSAX, but all I have on my 401k is an S&P 500 fund. I say don't worry about it, that's great. That was the fund, I believe Jack Bogle owned himself for all of his life, probably because it was the first one he created and he just didn't see the need to change. Somebody pointed out to me recently, Tesla, as some of our listeners may know, recently was added to the S&P 500. Somebody pointed out to me that if you owned VTSAX, you have benefited from the rise in Tesla for a while now, whereas if you own just the S&P 500, you're only now having exposure to Tesla. And that's absolutely true. On the other hand, one of the beauties of index funds is their self cleansing. And I'm proud of that term because I coined it. And what that means is that as the Teslas of the world get created and begin to grow, you benefit from that. But also companies have a life cycle and as they begin to fade away, they slowly fade off of the indexes. And that's the cleansing part of it. So while you got into Tesla earlier with the Total Stock Market Fund, the laggards are going to fall off of the S&P 500 fund before they fall off of the Total Stock Market. So what you gain on the way up, you might lose on the way down. But again they track very closely. I kind of think about it. The small cap and the mid cap stocks that I have with the Total Stock market are kind of like Tabasco on my eggs. I like Tabasco on my eggs, but the eggs are nutritious without it.

I want to say thank you so much again, I do apologize for interrupting briefly. JL I definitely want to say thank you again for taking your time out to answer my question and truly I love what you do for the community and of choose fi and just Everything. How you take your time to answer so many questions and write such great publications on your blog. And thank you again.

Thank you for the very, very kind remarks. I appreciate it.

Thanks Rodion. Actually, I have a quick follow up question, JL I mean one thing. Do you think that you get the same international exposure from the S and P and broad market funds?

So that's another big question. And it's one I get a lot. I, as people who read my stuff know I don't recommend international fund or international funds. I'm not opposed to them. And that's the important thing. If people want to add them to their portfolio, I think the Boglehead's like a three fund portfolio. And, and along with the stock and bonds that I recommend, they like international. I think with the s and P500 or with the total stock market fund, you have it covered because the largest US companies are by definition international companies. So I absolutely agree when people say to me, hey JL the rest of the world is growing. It's not just the United States. I absolutely agree with that. And I think that's a trend that will continue. But I also benefit from that without having to step outside of the United States. The United States, while it's not perfect, has the most transparent laws regarding equities in the world. It's cheaper. International funds are a little more expensive, although that gap is closing now. Having said all that, when I'm traveling overseas, I tell a different story. And I tell those people to invest in a world fund. The reason I tell them to invest in a world fund is I think that's where the future is going. Number one. I think eventually, and I have this conversation with my daughter, eventually Americans will want to do that as well. I think nobody, no other place in the world can you invest in your own country market and call it a day other than the United States. So if I'm talking to a Brit or a German or a South African or a Japanese, I wouldn't be comfortable investing in just those markets. Now they could invest just in the US market. But I think if I was a national of another country, I'd be uncomfortable doing that. And especially as I say, I think the future is going to be investing in the world market. And the reason for that, just real quickly, if you'll indulge me, is if you go back to World War II, the end of World War II, the entire industrialized world was in ashes other than the United States. And of course that's because setting aside Pearl harbor, none of that War was fought on our soil, so none of our factories and cities were bombed into ashes. So at the end of World War II, the world economy was pretty much the United States. That pie was pretty much 100% ours. You fast forward and our slice of that pie is, I don't know, 50%, something like that today. That sounds like, wow, been a bad run for the United States. Until you realize that pie itself is much bigger. And our economy, of course, is much bigger than it was in 1948. So we are benefiting from the growth of the world. I see that trend continuing. I see the pie getting bigger and bigger. I see the US Portion of that pie getting smaller. And at some point that would make me want to invest in a world fund. Probably not in my lifetime. This is not something I see happening in the next few years. But as I said earlier, it's a conversation I have with my daughter and something that at some point in her life she might want to consider.

Great. I actually want to go back to what you were saying earlier about self cleansing portfolio. There's been quite a few questions in our chat, the most popular being how do you create a retirement accumulation and drawdown plan that operates on autopilot?

So that's actually pretty easy, you know, if you're invested with Vanguard, which is where I'm invested. But this would be true of really any investing investment house, Fidelity, T. Rowe Price, and you're in index funds like I've suggested, bonds and stocks. You can do a couple of things. You can say to the, to the brokerage house that you're in, send me a certain amount of money every month. You can say, send me my dividends and interest payments. You can have them reinvested or you can have them sent to you. So there's any number of mechanical ways you can do that. And any place that's holding your investment should be happy to walk you through that process and set it up. And of course, when you get to be 72, if you have IRAs and that kind of thing, you're going to have to make withdrawals called required minimum distributions, which are RMDs. I'm closing in on that moment in time. And there's no way around that. You don't have to spend that money. You can reinvest it. But like we were talking about with the Roth conversions, it's a taxable event because your Uncle Sam figures he's given you a tax break long enough and he wants his cut now. So there you go. What I did personally, incidentally, and this may apply to a lot of our listeners who may be coming to this approach later in life, as I did. Candidly, I had a lot of investments other than my index funds, not a lot because I winnowed them down over time. But I still had some individual stocks and some actively managed funds, and I just targeted those to be the ones I sold off first. I sort of cleared out the cats and dogs first, and then when it was just down to the index funds, as it has been for several years, set it up automatically with whoever's holding them.

Sounds simple.

Yeah, it is.

I'm going to take one. We have another. The next most popular question we got that was just a question that was upvoted is, Jim, what are your thoughts on active funds, especially the Arkansas invest funds that are pretty popular of late?

Well, first of all, I don't know anything about the ARK funds. I don't know anything about any specific actively managed funds because I don't invest in them. I did for a number of years. I was actually slow to embrace indexing. I was for a long time a stock picker and by extension I tried to pick actively managed funds, that is to say, managers that I thought would outperform the market. That's a losing battle. I mean, the research, and there's been tons of it at this point clearly states that simple index investing outperforms active investing. That's counterintuitive. If you're into this stuff, it's hard to accept that, gee, if I just pick the best companies and ignore the obvious dogs, I should outperform the market. But of course, today's obvious dog is tomorrow's exciting turnaround story, and today's best company is tomorrow's Enron. I mean, there's just no predicting those things. And active managers, you know, don't outperform. They just don't. A certain number of them do in a given year or given five years. But you got 15, 20, 30 years. Think you got 30 years and less than 1% outperform. And there is, by the way, a huge survival bias when you look at the marketing from these companies because they start new funds all the time and the ones that don't work, they just quietly close and they roll it over. So you only hear about the ones that happened to work for whatever period of time that was. When Jack Bogle first started Vanguard and created the first index fund in 75, he was roundly ridiculed. And the head of Fidelity Johnson by name actually ran a series of ads calling index investing un American, which Jack Bogle promptly framed and put in his office. But at the time, it was an intellectual concept, it was an idea. It was backed by some pretty compelling research that it should work, but it didn't really have a track record. And so it was very slow to start. But now, 45 years out, we know which wins and which doesn't. And by the way, that doesn't mean that you can't make money with actively managed funds or picking stocks, for that matter. I did. I achieved financial independence with both of those things before I ever bought an index fund. I just made the road a lot harder, a lot more expensive and longer than if I'd embraced indexing earlier. But they'll get you there. If you want to go through that, They will make. They will make your managers wealthy, by the way, if that's one of your goal, is to enrich the people who run them.

Yeah, I think that's one thing a lot of people don't realize is, you know, when you start out and you're paying, hey, 1% advice fee or something like that, or when I started my career, there were these 1% loads on mutual funds. It's like, hey, so it's one thing when you're saving 1000 bucks, doesn't seem like that much money. But then you build up a million dollars, it's $10,000 a year, plus you're giving up all the future returns on that money. So it can end up being 30 or 40% of your potential terminal wealth.

Absolutely. There's some people have done some great modeling on that subject. It's appalling how big a drag a 1% fee is, let alone a 2% fee, which you can easily get up to if you hire somebody to manage your money and then they put you in active funds. And by the way, even the fees for active funds today are, are much lower than they used to be. And you can thank Jack Bolo for that as well, because they're responding to the competition. But one way to look at it, we talked earlier about the 4% rule or guideline, the idea that you can take 4% of your portfolio each year to live on. Again, let's go back to our example of a million dollars, and you say, okay, I want to take my 4% and that's $40,000. Well, if you're paying a 1% management fee, 10,000 of that 40 is going to your manager. That's 25% of your annual income. So that 1% fee doesn't seem so small anymore. So again, Jack Bogle once said, performance comes and goes. Fees are forever.

Yeah, it's so true. Because I help people review their plans all the time. And those fees for advisors aren't necessarily. They don't show up in your expenses because they're taken before you see your returns. And when you compare your expenses versus how much you're paying the advisor, sometimes it can be shocking that 50% of your annual budget is actually being paid towards your advisor, depending on your asset. So it's an interesting way of looking at that fee.

Yeah, I mean, if you look at 1% of $100,000, you say, well, that's $1,000. That's a lot of money. But okay, that's not too bad. But when you look at it, as you just said, is not of your total $100,000, but whatever percentages it is of what your money earned that year, then it's, you know, then it's a much more horrifying thing to look at. On the other hand, if you're like me and your investing life goes way back, you remember a time when you commonly paid 5, 6% to trade a stock, and then you paid it again getting out of the stock, so you could have a 10, 12% round trip. So things are better today, even in active investing. But there's just no reason to pay those fees in my world.

Yeah, I mean, I want to make one last comment before moving to the next question, which is like, in general, when you look at the financial services industry, and that's a big part of my career, it's paid on two ways, generally 1% of assets or two transaction fees. But overall, these fees are not transparent. Like Michelle was just saying, very often you won't even see them. The fees come off before you even see your statement. So you don't know they were there. Now, with the secure act and stuff like that, there's getting, there's going to be more visibility in what's happening inside of 401ks. And then, you know, with Jack Bogle and Vanguard's work, there's definitely a lot more visibility into fund fees. But you have to understand that, and that's why asking anyone who provides service to you, are you a fiduciary? Right. Are they acting in your best interest? But more important, how are you paid? And what are you paid is huge because you can go out and get these services. You can hire a cpa, you know, you can hire a tax guy, and you might pay them 100 bucks, 200 bucks an hour, but at least you're paying them properly. You could pay your doctor or dentist or anything, everything else. But if you understand that and you're out there paying tens of thousands of dollars or, you know, thousands or tens of thousands of dollars a year, you know, it's, you're, you don't get that money back and you know, we only have one shot at this life anyway. That was it.

No, I agree with you. And I've been a pretty harsh critic of financial advisors and I've met a number of them since starting this blog. And one of the things that they will say to me is those are the two most common ways that they make money. What you just described, Stephen. But of course there are also some that charge on an hourly basis, just a fee basis. And what they'll tell me is customers don't like the fee because they have to write me a check, even if it's less money. They don't see the commission, they don't see the percent of assets and so they actually prefer that. And I make more money as an advisor. So yeah, you need to be an educated consumer as the saying goes.

Yeah, I mean, and we're not for our company. We are not against advisors. We just want people to have visibility and understand what they're paying. And you know, it's hard. I mean, financial advice and making money by making decisions about your money. It is good to have a third party. You know, you need to be educated. It's also good to get expert third party opinions, but just make sure it's transparent, you understand kind of how what the incentives are and there's no misalignment.

You know, I agree with that. And there is a need for this kind of service and there are good advisors out there, but it's also a field that is just creates great opportunity for charlatans. And it seems to me by the time you educate yourself well enough to sort through all the financial advisors out there and you're educated enough to pick a good one, you could have educated yourself to do the investments on your own. It's not that hard. The problem for advisors is that inherently your needs and their needs are not aligned. Even if you have an honest advisor, they almost always are in a position of having. If they're going to do what's best for you, almost by definition they are doing something that is not as good for them. If they're selling you a product that has a lower cost or lower commission, that's obviously not better for them. But a real simple example is if you go to your Advisor and you say, you know, I have this $100,000 sitting in my bank account and I'm wondering, do you think I should pay off my mortgage or should I invest it? That's a great question. And there's a lot of different ways to approach that question depending on your situation. As far as your advisor is concerned, there's only one way that works best for him and that's if you keep your mortgage and invest the money with him because that's how he gets his fees. If he tells you pay off your mortgage, well, that's $100,000 he's not going to get darn money on and commissions on. Now it's hard to make recommendations that go against your own self interest and that's asking a lot of anybody short of a saint. And it's not a field that attracts saints as far as I can tell.

Oh, yes. Can you hear me okay? Yeah, sorry about that. Yeah. First, just a real quick comment. I did purchase start purchasing real estate 25 years ago and right now it's about almost half of my portfolio. So it's worked out real well. It's single family homes for the most part. I'm manager. So you're right, it can be work. And we learned somewhat by the school of hard knocks, but it's turned out well. But people have to realize you don't start investing in real estate when you're 60. You have to do that earlier. It takes a while for the cash flow to increase on that. But we're real happy with having a, that balance in the portfolio that if the market is down for a while, it gives us some ballast in the portfolio.

And like anything else with practice, it's probably a lot easier for you now than it was when you started 25 years ago. So you're benefiting from your knowledge.

Right, Right, exactly. So in my portfolio we've got, and you talk about getting into bonds, but to be honest with my real estate, I wouldn't have to take any money out of my investing portfolio that's in the market. And so I'm looking at maybe just staying in the market in stocks even. I'm 65 now and maybe retire next year because I really don't, I don't have to take the money out and yeah, I do at the RMDs, but if the market's down, I pull it out and put it back in, Pay the taxes and put it back in. So I know your thoughts on that. If you don't have to withdraw the money, if you would stay in longer, a higher percentage in stocks.

You know, Martin, that's a really interesting question that I sometimes get in a little different clothing, if you will. So the common wisdom says something like, if you've won the game, you stop playing. So common wisdom would say that for you, you've won the game. You've got this real estate portfolio that's thrown enough cash to pay your bills. You got this stock portfolio that you really don't have to touch, so you really don't need it. And they would say, why take the risk of stocks? Why don't you just unload that, go into something much safer like bonds. That's the common wisdom. I disagree with it. That's fine if that's what you want to do. If the volatility of stocks is bothering you, clearly it doesn't seem to be bothering you, Martin. Doesn't bother me. The other way to think about it seems to me is if you've won the game, you're now in the strongest possible position to keep playing it for exactly the reason that you just outlined you doesn't matter if your portfolio is up or down, you know, and you're not pulling on it at all. And when you pull on it From R&D's, you're just going to reinvest it, what have you. And of course, we know as much as we can know anything that over time the market will go up and the volatility doesn't bother you. So I'm 100% in your camp. I gave an interview a number of years ago and the final question was if you had $100 million, somebody gave you $100 million JL what would you do? And this is after spending an hour plus on this interview and talking about all the things we've been talking about so far. I said, well, I'd drop it into VTSAX. And of course, if somebody dropped $100 million on me, that would be the very definition of having won the game. But yeah, so I agree with you. I think you're in an ideal position to keep a high stock holding.

One quick follow up for bond, if you know, ingoing part bond, bond ETF or individual bond, I will.

I don't invest in ETFs, but just because I invest in funds and they're, you know, it's, it's six of one, half a dozen the other. But I definitely like an ETF or a fund for bonds because the, you know, one of the risks of bonds is. Well, there are several risks with bonds. Default is 1. If you're in a broad based bond fund, you don't have to worry about a given bond defaulting. You don't have to worry about it being called early. You don't have to worry about reinvesting the money when it comes, when the bond matures so that you don't in a real way. You don't even have to worry about rising interest rates which will drive down the price of your existing bond. Because if you're in a bond fund, there are always bonds in that fund maturing that they're then taking that money and buying the new bonds that are paying the higher interest rates. So there's just a whole bunch of reasons that I prefer a bond fund or a bond ETF over individual bonds. There is a chapter in my book on this and there's a in the stock series on my blog, there's a post on bonds if you want to dig into it a little more.

Okay. Well, thank you so much. I just did order your book here, so looking forward to getting it. Thanks again.

Well, thank you so much.

All right. Well, Philip, you're the last question of the night here.

And you're still on mute.

Okay.

Can you hear me?

Yes, I hear you now.

Hello, I'm calling from Atlanta. I had a question. It's a little bit in relationship to the, the bucket question. I refer to it as sequence of returns. I don't know if you've heard that expression.

Sure.

I hadn't heard about it until earlier last year for the first time. And I just luckily happened to fall into meeting the criteria. Of course, the conversation deals with. You Talked about your 4% rule and the Monte Carlo analysis. One thing that always seems to throw a monkey wrench into that is within your first year or two of retirement, there's a recession or a big downturn in your stock portfolio. Of course, you don't want to draw money out of your stocks at the time they're at their lowest. So the question is how much liquid assets should you have to ride the storm so you don't have to draw money out of your stocks, which of course may decrease that 25 to 30 year longevity you're looking for in retirement to a much shorter time frame?

Well, so Philip, let me start by saying I don't think it actually does throw a monkey wrench into it. So for the people listening who might not be aware of it, sequence of return risks is just kind of a fancy way of saying what happens if you retire. And shortly after you retire, the market takes One of its periodic plunges into really deep negative territory and maybe stays down a day, stays down for longer than a year. Is that going to ruin your retirement? Well, the 4% rule, again comes from the Trinity study. And one of the things that people seem not to understand is that it's a very, very conservative rule. The truth is that most portfolios survive with much higher withdrawal rates, 5, 6, even 7%. Now, the higher the withdrawal rate, the more likely you are that you'll run out of money. And the Trinity study, by the way, looks at a 30 year window. But to give you an idea, if you have a 5050 stock and bond portfolio, which is pretty heavy on bonds, and you're withdrawing 4% a year, and you are adjusting it for inflation every year, which is asking a lot from a portfolio, it succeeds 96% of the time. And that takes into account the years where you have sequence of return risks, where your retirement starts on a bad note. So I think the concern over 4% has a withdrawal rate against the sequence of return. Risk is overblown. The market doesn't take these plunges very often. It does take them and it will take them again. So your risk of it happening to you is relatively small. If it did happen to you, like anything else, you adjust. The 4% rule again assumes that you'll pull that 4% adjusted for inflation and make no changes, regardless of what the market does. Well, I know about you, but I'm not going to do that. This is why I don't like to call it a rule. I like to call it a guideline. I think it's a great idea to retire if you think 4% of your portfolio is the lifestyle you want. And then I for one, am going to watch that pretty closely. In fact, when I First retired in 2011, my daughter was in college and our withdrawal rate was five, five and a half percent. Now, I kept a close eye on the market and the wind was at my back for those years because the market was going up pretty sharply, had it turned against me, I certainly would have adjusted our spending. Just like if you went to work on Monday and your boss said, gee, we love you and we sure hope you stay, but times are tough and we got to cut your salary by 25%. Well, it'd be a bad day, but you probably wouldn't go back and keep spending the same amount that you were. You'd adjust to it. So I think that's the way you deal with it. That's the way I would deal with it rather than Keeping a bunch of money in a bucket just in case. Because you have to understand that money loses value to inflation steadily. It's non productive and I'm assuming you've got it sitting in a money market or savings account. So if you're doing it in my thinking is you're doing it more to comfort your psychology rather than a financial decision. And there's nothing wrong with comforting your psychology. That's kind of goes back to our discussion earlier. What percentage of bonds should you have? Well, that depends on how badly rattled you are by the volatility of the market. Right. And that's comforting yourself psychologically. Hope that makes some sort of sense, Philip. And that's my perspective. For what it's worth, I mentioned that I would never set it at 4% and just let it run and not pay any attention to it. One is that as slim as the risk of running out of money is, it's not zero. So you want to pay attention for that reason. But the other reason, candidly is the much more likely thing that's going to happen is that if you're pulling 4% into your portfolio, it's going to continue to grow and compound. And over the decade you retired, you're going to wind up with more and more money. If you're not paying attention to that, that's money that you could have been spending and enjoying. So not only do I want to watch it so I don't wake up one day broke, but I want to watch it so I don't wake up one day with 10, $15 million I could have otherwise enjoyed. In my book and also my blog where I talk about the 4% rule, I reproduce some of the charts from the Trinity study. And it's really interesting to look at how these portfolios actually perform with different withdrawal rates and different allocations. And of course the big question everybody asks is, well, what's the safe allocation? That always works. And if you look at the Trinity study, again, if you're, you know, if you really want to be very conservative and you're pulling 3%, I don't think there's a scenario where that does not work. But if you really want to get conservative, invest in VTSAX and spend only the dividend, which typically runs about 2%. So there you go.

Davarin, I saw you jumped on. Did you want to ask a question?

Yeah.

First of all, I'd like to just thank JL for all your contributions to the space. Using your words, you've contributed more than many lifetimes of people in the financial industry and I just wanted to thank you for that. I do have one question for you, and I think you're probably the authority for this since you've attributed most, if not all of your work towards helping your daughter. And that is, how do you reconcile assisting your children on their path to financial independence without doing too much for them, potentially stunting their self development?

Wow, that's probably. You get the gold star for the most difficult question of the day. And I don't know that I have a really good answer for that. You know, we did think about. Our daughter is 28 at the moment and she's got a very good head on her shoulders and she's very fiscally responsible and she is on the simple path. So it worked. I was talking to a friend of mine a couple years ago and he made the comment that all of his adult children were also financially responsible and so he wasn't going to leave them any money because they didn't need it. They said, you know, that makes. I could see that that makes sense. My daughter isn't going to need any money if I were to leave it to her. But on the other hand, the fact that she's turned out to be fiscally responsible makes me a lot more comfortable turning the money over to her. Had she turned out to be a wastrel, I, you know, I wouldn't even think about putting money in her hands. That's, you know, that's like, I don't know, putting a loaded gun in a child's hand. It's just, it's too dangerous in terms of how you raise them that way. You know, we always lived below our means anyway. So the way she lived as a child was, was modest. You know, she didn't, when she was in school, get to buy all the latest fashions. We lived in a fairly wealthy neighborhood when she was growing up and a lot of her schoolmates were getting cars when they were turning 16 and she was campaigning for a car. And I kept turning her down and she kept coming up with new arguments. And she and I were at lunch one day and she said, well, lunch she invited me to, by the way, and she said, okay. She said, I want to make my case for why I should get a car. And I listened to her and I listened to her and she made a really compelling case, I have to say. And I said to her, well, Jessica, you know, if you really want a car when you turn 16, I have to tell you, you have made one critical mistake. She said, what's that? I said, you picked the wrong father because I'm not going to get you a car. She said, but dad, all my friends are going to get cars. I said, great, it'll be easy to get rides. So I think drawing some lines probably helps, but I certainly don't have a magic formula and I'm not an expert in doing it. I, I think I got lucky as much as anything.

I want to make one follow up here. There is actually going to be potentially up to $30 trillion passed between generations as especially the boomers and earlier generations pass on. One thing that I think is going to become a much bigger deal is estate planning trusts. A lot of folks are setting them up to try and be tax efficient. I have a friend of mine who has, through a lifetime of hard work and being super frugal and just saving money has built up a lot of money and it's compounding and growing almost out of control right now where it's just getting bigger and bigger and it's actually in a big chunk of, it's now an irrevocable trust and like no matter what he does, it's going to go to his kids. So you have to think about this because if you put a bunch of assets in some of these things and they continue to grow, you may be setting your kids up to get a bunch of money that you may change your mind on in the future. So structuring those things and also gearing it so they get it when they're older, like over 30 or maybe at 40, maybe it's parcels out. So they're not like getting a bunch of money when they're really young is worth considering. So I do think this could become, you know, hopefully for all of us, you know, an issue to consider and think through and be thoughtful.

Have to have a whole other session about that topic.

Yeah. You know, and that's a, that's a great point, Stephen. People, people don't realize the power of compounding. And so if you're looking at young kids today and you're creating a trust and you're probably thinking about what your wealth is at that time. And compounding is amazing. When I go to these chautauquas, I have one on one sessions with people and they'll bring their numbers. And these are all smart people who can do basic math and they're familiar with the 4% rule and 25 times, and I remember one woman, she was a banker, so certainly she new math. And he said, you know, the question I have for you is, am I, financially independent, could I retire? And I said, okay, let's look at your numbers. And she had $5 million. And I said, okay, you know, $5 million. How much are you spending? Said, well, I spend a lot. And I said, okay, how much do you spend? I spend $100,000 a year. I said, you know, yes, you're there. You're way past there. And I've often wondered why these people who can do basic math would ask me this question, because it's the most common one I get. And the conclusion I've come to is that compounding works like a hockey stick, right? You start on this path and you start saving, investing, and it's really slow. And it seems to grow very. And then all of a sudden at hockey sticks, and it becomes a big number that keeps getting bigger. And it's hard to believe. And it's not that they can't do the math. It's they can't believe what the math is showing them. And it's like they see some weird thing on the wall, and they were like, you see what I see up there?

So, anyway, well, I hope we all get to that point where we're seeing that hockey stick and in disbelief that we're all ready for financial independence. I think I speak for everyone on the phone. Thank you so much for all of your wisdom and just the eloquent way that you're able to describe all of these complicated topics. I know I learned a lot tonight just from hearing you reiterate some of the things from your blog and your book. And I'm sure everybody else really enjoyed everything that you had to say as well.

Well, thank you so much for the invitation, and thank you to everybody who tuned in and spent some time with us tonight. Very much appreciated. I'm honored.

Yeah, JL definitely want to second that. It's been great to learn from you and get to know you better. Appreciate your time to come here and spend your time talking to our folks, our community, and everyone who participated. Really appreciate your support and your questions and engaging on this topic. I think there's a lot of work to be done to educate ourselves and also the next generation about personal finance and good choices and transparency. And on that note, one last request I would have is we're growing this by word of mouth, so it was awesome to hear a question from the UK tonight that was pretty exciting. So any sharing of our site or podcast or tools with your friends is appreciated. All subscriptions are appreciated. I mean, we are basically really trying to fund this on our kind of like $6 a month plan so that we. That's why we make money and so that we can deliver a completely unbiased, fully aligned platform for everybody. Okay. But thank you.

Thanks.

Thanks, all.

All right, take care. Bye. Bye.

Bye.