JL Collins: "The Simple Path to Wealth" | Talks at Google
Please. Welcome jl college. Thank. You. Welcome. So. My. First question for you the, title of your book is the. Simple path to wealth it is and, it's. A roadmap to financial, independence and, a rich free life so, what, does wealth, mean, to you and how is it tied to a free life. Well. I suppose we could look at that in two different directions so if, we think about the psychological, part. Of it to. Me personally what wealth represents. Is security. And freedom. So. Security, to protect you from the from. What the world can throw at you and and freedom to chart your own path in a way that you couldn't do without the resource, on. The financial, point of view I suppose. When. I think about what the benchmarks, are for, are you wealthy, or not have, you achieved financial. Independence or, not, what. Has come to be called the 4%, rule is a good guideline that. Comes out of thing called the Trinity study and. Without, belaboring that, point it simply suggests, that, if. You have enough assets. That. 4%, of, that amount, can, cover your annual expenses, you. Can consider, yourself financially independent. So. You can work at it from two different directions you could say well I have a million dollars, so. Four percent of that is 40 thousand dollars and. I live on forty thousand dollars a year or not and therein. Lies the answer to your question or you. Can look at it from the other direction you didn't say you know I need 40 thousand dollars to. Live on so, how much do I need to be financially, independent you. Multiply 40 thousand by as it happens 25, you. Get a million dollars and there's your answer so, it really depends, on what, your needs are. And. Why. Is it important, to keep the path simple, I think there are a lot of folks, tuning in or folks in the audience who have, read financial independence books, and maybe their, eyes roll back in their head because they just can't make sense of it all so why. Is it important to keep it simple well that's one good reason. But. The, reason that I prefer keeping it simple is simple is simply more powerful, simple. Is what gets you the best results. And in, this case when I talk about simplicity I'm talking, about index, funds and, specifically. Broad-based. Stock. And, then bond index, funds when you bring them into it there. Are a lot of reasons that simplicity, is an advantage it keeps your costs low it. Keeps your life simpler. It makes things when the time comes easier, on your heirs but. The most important, thing is it is the most powerful way, to reach. Financial independence. People, who come to my blog are always I get two kinds of readers, of my blog people, are really into this stuff and they. Always want to tinker and that's. Not who I'm really writing for I'm. Writing for people like my daughter who knows that it's important, but. She has other things that she'd rather do with her life than fixate, on finances. And investing. And so. When you have a simple path you can just get a couple of things right you know have a very powerful performance.
You Will outperform the vast majority of professionals. Out there and I, am fond of saying to those people who want to tinker if, I thought there, was a way to successfully. Tinker and do better then. That's what I would have written the book about and in fact I wasted, a couple, of decades trying to find that. So. You have a blog JL, Collins and H comm if, folks. Are interested in your. Content. Should they begin with your blog or your book. What. I would. Suggest that if you don't know anything about me or this concept, I would, go first to the blog and. I would go to there's, a button at the top called stock series, and the blog is best, known for my stock series of posts and. When. You click on that button that will take you to. An. Introduction, and in that introduction, is a link, to what. I think is the best review of my stock series that's, been done and that best, because it's most favorable, but in my view most accurate, so, you can click over to that and read that brief review, and after reading it you'll, know very clearly, whether this is gonna resonate, with you or not and whether it's worth your time so I'd start there and then, I would read a couple of the posts, and. Then if you like what you read you can consider going on to the book there, is nothing, in. The book that's not in the blog so. You can get all the information just, by staying on the blog the. Book is more concise it's. Better organized, because the, posts, in the blog came, organically, as they occurred to me or were suggested, and, the book has the advantage of being better organized, it's more concise and I. Spent. More time polishing. The writing so I hope that the writing is more polished, but I'll @uj you'll make it there's edge of that and. Thinking. Back to the early days of your own investment. History how. Did you learn all this stuff how did you learn to invest. Well. I did it the hard way I mean trial, and error. Yeah. I spent. As I alluded to earlier. Decades. Trying, trying to do things that were not was, it what's. What's. Seductive, about this is. That. They were, subpar. But. Not bad performance. I tell people that long before I discovered, or embraced index investing I had, reached financial, independence so, I reached financial. Independence by, picking stocks and picking. Mutual. Fund managers, active, managers, who. Could pick stocks or thought they could pick stocks so. It can be done the problem with it is it's more expensive it's more time-consuming it's, not as effective, as indexing, so, I would have been much better off if, I, discovered, indexing, earlier. The. Great irony, is the Jack Bogle who was the founder of Vanguard and the, inventor of the first index. Fund available to the public, launched. That fund in 1975. 1975. Was, the first year I started, investing, I'd. Never heard of Jack Bogle or Vanguard. Or index funds when I started, it. Was ten years before I heard, of them and then it, took me a disturbingly. Long time to, embrace it and. So, I. Wouldn't. As people say how do you know all this stuff and this well because I made just about if you can think of a mistake you could make in, investing.
I've Probably made it so. To the extent that I know anything it's from my mistakes, so. Speaking, of mistakes what, do you think was working in your favor versus, working against, you as you were trying to figure this out on your own well. I think the the main thing that was working against, me at the time and that is working against, everybody. Listening, to this is, there, is a, large. Industry, Wall Street whose, drumbeat. Is counter. To our best interests, in. That is based on making this as complex, as possible, putting. Out a siren. Song that, you too can be Warren Buffett, you. Too can pick stocks, you. Too can outperform the, indexes. Only. If you if you're only if you're willing to pay us for, the privilege and that's. A very seductive. Message because everybody, wants to think that they can be above average and, outperform. People. Well right. But. Maybe not an investing, okay. Now. The irony. Is if you invest, in index funds and of course the slam that active managers, put, against index investing is that, you will only get average, returns. That's. A little bit misleading because, yes. The index, gives you the return of the market overall, but. That return, is far. Above average, index, investing. Based. On the research that have been done. Outperforms. Depending. On on what numbers you look at 80, to 85, percent of, active managers, over. A 15, year, period of time if, you research out 30 years the. Number of active managers, who can outperform, the index is, less, than, 1%. That's. Statistically zero. So. When you invest in the index and you're, getting the average performance. Of the market, you're. Actually getting the best performance, that you can expect by a long shot. Gotcha. And so what. Was working in your favor I, think. What was working in my favor is is I. Continued. Being curious and I. Continued, trying different things that I continued, researching, and, indexing. Which was first put in front of me in 1985. By a good friend of mine there's. Something about it that is very counterintuitive, and, I think, particularly. For smart people like the people in this room and the people listening, because. You. Look at it and you say well indexing, says they buy every stock in the index and. Yet, if, I can only just not. By the obvious dog saw it perform. I mean outperforming, seems like it should be so simple but, the problem, with that or even if I just buy the top performers, and not, even buy the mediocre. The low performing, ones you know obviously, I'm gonna outperform and yet you look at that research that says, that, doesn't, happen and. Of course the reason it doesn't happen is today's dogs or sometimes, tomorrow's. Great turnaround success, stories and those. That are flying high, are. The stories of how they crash and burn so there, is no way to know what. Is gonna happen with with, specific, stocks and it is just way too easy to. Guess wrong. So. One thing that struck me about your blog and your book is how specific, the advice is so. In. Other books, are websites I've tried reading in the past the, advice was always really vague like, invest. In mutual funds and it would leave me thinking well, which one and how much so. Why. Do you think other authors. Advice, is not very specific. Well. I'm not sure I can answer that because I can't put myself in the heads of other people. Maybe. I can answer it by by telling you why my advice is what it is and that's. Because I didn't write. This blog to have the international, audience that I have today that it never. Occurred to me that that would happen I had, started, actually writing a series of letters to my, daughter about financial, things I wanted, - no and I, shared it was a business colleague of mine he said you know Jim this kind of interesting stuff, you. Might want to share with your friends and family and a blog would be a good way to do that and, this is in 2011, I, like. The idea of a blog because it occurred to me that would be a great way to archive the information. But. I didn't, have a plan, to create a. Blog. As a business, or as a successful, way to reach a broader, audience it was just to, archive the information, I wanted my daughter to know and, that was basically, what. Mistakes I've made what's, worked what's kicked me in the ass and what, I think, specifically. She should do and. So, I think that's why my advice is so specific these, are the things that I'm doing now these.
Are The things I wish I had. Done. In 1975. Or at least in 1985. When I became aware of indexing, these, are the things that I, want, her to do and that I've got her started doing so, that's maybe why my advice is is more. Specific. Than others okay. Yeah. I can't tell you how many times I've talked, with a friend about. How. I'm on this new track, where I'm investing, and they say well what are you doing and I just send them one. Sentence, of exactly what I'm doing in it that's what I read in your book and they're, like that's it and, I'm like that's it that's all I'm doing so aside. From telling, them to open their computer, it start it up and what, clicks to make to log into their account it's such simple advice you. Know I was a. Year. And a half two years ago I was. Interviewed, by faranoush. Torabi on. Her podcast and, I don't know if anybody's listen to her podcast but, at. The end of her interview, she likes to ask a question, that says if, you were suddenly given, a hundred million dollars what would you do and, the, typical kinds of answers she gets as wide by this that I give this money away I do that and and. Of course she's, interviewing, me we're talking about index fund investing, and specifically. VTS. Ax which is Vanguard, total stock market index, fund and, the, one I recommend the most and love the best and so, when she got to that question, Jim. What, would you do I'd put it in VTS ax and. She was ship really that's what you do. So. One, of my favorite posts on your blog is, called, why. Your house is a terrible, investment. And. I I, know you've got a lot of feedback from your readers about your feedbacks, one way to say yeah so. Why, do you think this post, is so controversial, why, dear, readers get, so excited. About this post, you. Know somebody not me but somebody said. Home. Ownership is the American, religion. And. You. Could go to, Daley. Plaza, in. Downtown Chicago. And you could set up your little soapbox and, you. Could climb up on it and pick any. Major. Religious. Leader and begin. To vilify that. Individual. Jesus, Christ Mohammed. Buddha. Who had ever just vilified, them in though in the. Most horrific terms, possible, and, people. Would just turn. Around and walk away I mean they'd ignore you you. Get up on that same box and suggest, that home ownership isn't, the perfect thing very ready to do and they, start gathering rocks. So. I think it's, polarizing, and, the people who love, their homes and love. The idea of owning a home. That. Gets that response and then there's another segment of people who. Don't, like owning homes and see value and renting, and, they. Muster, to the cause and, and that's what makes that post to. My surprise, because I kind of did it tongue-in-cheek. And I, by the way I'm not anti, homeownership, I have, owned homes most, of my life I. Am, anti, believing. The propaganda. That it is always or even commonly, a good financial decision, it. Can be a great lifestyle, decision, and that's why. I bought the houses I bought over the years but. I never once, bought them thinking I was doing something that was financially. Astute because. Unless you happen to get lucky with, a rising market and that does happen it's. Generally, not the best thing you can do with your money if financial. And depend your goal, and. So for the person who's at the point where they're considering. Buying their first home or condo, what. Considerations would. You advise them to make before, they do that why. Isn't the first thing along the lines with what I just said was to understand, that you. Are not, making, an, investment, you're. Making a lifestyle, decision, I in. My manifesto, on my blog one of the things that I say is something to the effect of. All. Of our decisions, don't have to be driven by, financial, considerations. But. You should always understand. The, financial. Dynamic. Of what you're choosing to do and I have a post about buy, vs. right and run the numbers, which.
Talks, You through how to do that so. I would suggest if, you're renting, now and you're thinking of going, into. A house or a condo that you first run the numbers and find. Out exactly what, it's going to mean financially. And it, might be that. It's going to be less expensive than, where you're renting that's possible, that does happen more. Commonly, you're gonna find that it's going to be more, expensive but. Then you know and just because it's more expensive, doesn't. Mean that you don't have to buy the house it. Just means that you understand, what, you're paying for the lifestyle, decision, that you're making. And. That was one, of the first conversations we, had at the Chautauqua, I. Wanted, to tell you a story about how I, frequently. Get asked like Rach are you gonna buy a place in Chicago and, I say well I read, JL Collins, book and cool. Renting, for now and, I told you a story about how my refrigerator. Broke right before I came to Ecuador. And just called my landlord and said need a new fridge see, you later I'm gonna go. So. Other. Than this post. Called. Why your house is a terrible investment is. There any other posts on your blog that's generated, a lot of feedback or controversy, from your readers well. That's the one that's generated, the most controversy. Because it's such a hot-button. Topic. Less. Controversial. But but, very popular. Probably, the two that are most popular is how, I failed my daughter and a simple path to wealth and that, was one of my earliest post that and, in that one post I kind of sum up the whole whole. Content. Of the blog in the book so, that's popular, why. You need a few money is probably. At. Least as popular. And. From the reaction the audience I gather, we have, people. Agree with that there's a famous video, on YouTube called the. Importance, of fu money. Haven't. Seen it write. It down, put your headphones on at your desk. Yeah. It's not suitable for work. So. I just. A quick. Aside on that, if I make, there's. A movie called the gambler which is not a particularly, good movie so I'm not recommending the movie but, there is a wonderful segment, it stars John Goodman, and it was a wonderful actor and there's. A wonderful segment. Little. Little piece in that movie, and you can, you, can google that and find, this, clip where, John Goodman, is talking, to Mark, Wahlberg and about. The importance, of having a few money and. When I saw that clip I thought I want, to do a version of that I want. To keep it as close to the original as I can but tweak it so it reflects, my. Values, he, talks about buying a house for instance and we've talked about that. But. My problem is I didn't know anybody. Who could who could make the film but, one of the wonderful things about Chautauqua. Which is where you and I met is that. You meet really cool interesting, people who come to Chautauqua, including. A couple of years ago a pair of film makers who were less. Than an hour from where we were living at the time and they came up and I give. You all this background because if you choose to watch this. It's. Filled with salty, language that I don't use everyday I'm acting, I'm I'm trying to channel John. Goodman and he uses the same language and if, you like it you think I do a good job in, it the, credit goes to my filmmakers. Joan. And. Terrible. Branagh drawing. A blank, on his name but. It's, if you go to my my blog and you to, the search function, you'll find it and and. You'll. See who they credit.
Is Given. So. We're, in the beginning of 2018 and this. Is a good time for folks who are trying to get their financial house in order to maybe come up with a 2018, plan 2018, and beyond and. The. Amount of investment options, is confusing, and overwhelming so. I know a lot of folks, who are, maxing. Out their 401k, because, that's very sound advice we get the full match they. Might also have an emergency savings fund but, beyond those two things they don't know what to do with what's left over and. They're. Just keeping their money and savings are checking or. Maybe. They're outsourcing, the management of their money to someone else so for. The folks who don't feel confident, investing. Beyond just, the 401k match and. They're. Just keeping their money maybe in savings or checking how. Should they begin to make sense of all these different options how. Would you advise them to get started well. The way the circles back to the advantage, of things being simple so. If. You think of maybe if you have a visual image let's, say of a. Long banquet, table. That. Is just groaning, under the weight of every, kind of food and preparation, and dish you can possibly, imagine. Think. Of that image as is what the financial, community is, and has laid out for us and that they want us to partake in the. Problem, is these are all very. Expensive. Things that. Are for the most part designed for the people who have created them and who sell them to enrich them, not. Necessarily what's, best for us that's. Bad news the good news is, you can put your arm down on, that table at one end except. For a tiny little corner and sweep. It all under the floor because. None, of that matters. Only. A very, small, sliver, of what out there really. Matters, for us and building our wealth that's. Index, funds and that's, very specifically. Broad-based. Stock. Index, funds and, broad-based. Bond, index, funds I mentioned. The one that I like the best is. VTS, ax which is Vanguard total stock market index, fund, more. Common, and the original, fund Jack Bogle created. Is the S&P 500, index. Fund that's.
Perfectly, Acceptable and the two are surprisingly. Close so, sometimes people get hung up on deciding, between the few, acts that have access to one and not the end other, go. For which, either one you have and then. There are total bond market funds that's, with those two, tools, that's. All you really need it, gets a little complex, with 401k, plans and, 403 B plans for people, are not in the private sector, because. They don't always offer, those. Particular, Vanguard, funds that I prefer. Most. Plans, offer, some, kind of broad-based. Stock. Index, usually. An equivalent. Of an S&P 500. It might, not come from Vanguard which, is my preferred company. But. An S&P 500. Index fund is pretty much the same no, matter who's. Providing. It fidelity. Or to you or price those are all fine options. And. So, if, someone, wanted to get started this year, and. They wanted to take a look at some index funds, but. They also know. That there are HSAs, 529. Plans. How. Would you recommend they. Get started like maybe, if 2018, was just gonna be a simple year, what, would your advice be if. They're feeling overwhelmed, by that all the different places they could put their money, well. I think. Manure. Really starting from ground zero, you you really do not have any base, of knowledge. On this and that's not a bad thing that could be an advantage because. At least it means you don't have bad. Knowledge, and there's a lot of bad information out. There so, if you're at that Ground Zero level, don't. Feel bad about it that's an advantage of some there's, nothing you have to unlearn. But. The risk of touting my own book in my own blog I would, go there and do, a little bit of reading and do a little bit of learning so, one thing in the way you phrase the question that. People need to be clear about and this, is something that I come across a lot as. I say well I want to invest in my 401, K or I want to invest in my IRA or I want to invest, in VTS ax. Well, you're, conflating. Investments. With what I come to call buckets so a, 401, K is not an investment, an IRA. Is not an investment, a TSP. Plan is not investment, those are buckets, and then in. Those buckets you hold your investments, investments are things like, mutual funds and stocks and, bonds so, those are the investments, that you choose to put in your bucket so. If you have a 401, K as you do at Google and. I have no idea what your 401 K looks like but you will have a list of selections. Of, investments. You can put in that 401, K bucket. If. My. Approach resonates, with you then you believe in broad-based. Index, fund, funds, are something you want to you want to go with you, can go down that list and maybe. Find, the, specific funds I'm talking about but, you certainly probably, find something, that, is a broad-based, index, fund the, easiest way to do that by the way is, to find the column, that shows the expense ratio and. You should have that you run, your finger down that and, when you find the very lowest expense, ratios, you have found the index funds and focus. On those and take a look at. And. Why, do you think some people choose, to manage their own investments, whereas others outsource, it to someone else. Well. I think the people who outsource it to someone else have been convinced, that this, just, too complex. For their pretty little head and. Moat. The vast majority of things on that banquet, table we talked about, our. Too complex, for anybody's. Pretty little head when. In. 2007. 2008, 2009, when, the economy, cratered, Wall. Street was selling, products, they didn't understand, so. If this stuff looks complex, to you it's because this stuff is complex, and in some cases intentionally. Complex but, we don't care about that because we don't need any of that and, once you understand, that you don't need that complex stuff, then. Doing, it yourself becomes. Much, more attainable, even. If you don't have any interest in financial. Stuff like, frankly my daughter. She. Doesn't she has better things to do with her life than fool around with this financial stuff that intrigues her dad and that's. Great I mean people, are bridges, to build and and you. Know ways. To make the world work the. Beauty of this is that if you get a couple of things right financially. You, can profoundly, change, your financial life without having to dwell on it and you, can get on with doing things that are more important to you and maybe more important to the world.
And. What, do you think are 2 to, 3 of the biggest mistakes, people can make when investing, or managing their money. Well. I think. Two, come to mind immediately one, is is. Thinking. That you can pick. Individual, stocks and. By, extension that you can pick, people. Who can pick individual, stocks that is people who run actively, managed mutual funds. One. Of the the, comments, that, makes my skin crawl. Is. When, I hear people say something, like well Warren. Buffett, became a billionaire picking. Individual, stocks I'll just do what Warren did, as. If. As. If there. Is a reason, that Warren Buffett is is, famous, because, Warren Buffett, has managed, to do something, that, is extraordinarily, difficult, to do the. Ability, to do it is extraordinarily, rare, and. The, hubris, to think oh I'll just go and do what Warren, has done is. To, me stunning, it's, just absolutely stunning, and the research indicates, that, what Warren has done it as we talked about you, go out thirty years and less than one percent of people trying, to do it who have survived that long have, accomplished, it so. I think. You need and this is I bring this one up first because this was my own stumbling, block, I just. Kept believing, that, I could pick people, who could pick stocks and I. Believe that I could pick stocks and because. Every now and again I get it right and. Maybe I got it right more often than I got it wrong that feeds, into that belief and. That's the thing that made me reluctant to pick up indexing, but. The truth is that the, few times I got it wrong dragged, down my performance. To. Worry and this is what happens to the vast majority people are trying to do it to, where I, would have been far better off with the index far better off so, trying to pick individual, stocks and managers, is number, one maybe not. Necessarily an order the, second thing is trying to time the market and. You. Can't turn on the financial, news or open up a financial, periodical. Without. Finding, somebody who's telling you definitively, where the stock market is going next. Nobody. Knows if, you could accurately do, that with any consistency, you'd. Be far, richer than Warren Buffett and far more lionized, it would be magic, dust. Nobody. Can tell you where the market is going you. Just can't. Predict, the market and trying to is. Is. A fool's, game, so.
Fidelity. Investments, did a little piece of research and, think about a year ago year and a half ago and they. Were curious as to what group of investors, in. Their funds did. Best, because. The research indicates that the people who invest, in a mutual, fund. Outperform. Her underperform. Rather the. Performance, of that fund. And. You say well how that possible, if they're investing, in the fund their, performance, should match the fund the. Reason they underperform. As they try to dance in and out they try to time the market, so, when fidelity, did, this research, they. Determined, that one group, of investors, did. Significantly better, than any, other group who. Own their funds and, that was dead people. The. Dead people outperform. How. Can you guess why, because. They didn't take her with their investment. The. Second, best performing, group were people who forgot that they owned the fund so. You, can't time the market and especially. When the market has been on has long a bull run as it has the. Media is filled with people telling you that they know what it's gonna do next at. Some, point the market will dive because. The market is volatile, it will that's, what markets do so, if you invest in the market you have to expect that you, actually have to expect the volatility, you, have to be willing to ride with it but. I don't know when that's going to do it and do that it could, be happening as we're sitting in this room together today I haven't, looked at the market, it. Might be 10 years from now I have no idea and nobody, else does the difference is I'm. Willing to say I don't know so. For, someone who may be interested in investing maybe when they go home today there they. Have some cash they want to start investing and, they. Say well the markets the highest it's ever been I'm going to wait for it to dip. What. Advice would you give to those to. Those folks who are waiting for the next dip well. If. We went back to March, of 2009. Which. Was when the market, bottomed and, its collapse. Almost. Every month since then you, could say it could have said the same thing I. Wrote. A post and I want to say 2014. Responding. To a reader who, was asking that exact, same question the market the S&P 500 was. 1600. And change and. This, reader was saying how could I possibly reinvest. How, can I possibly invest. It so nothing would go up for the last five years and, here, it is it's 1,600. And then bottom doubt it I want to say six hundred and something.
And. Where are we today now, I didn't know that at the time because. I didn't know where the market was gonna go but, you just don't know you can't, predict the market and by the way it's become fashionable to. Suggest. The p/e ratios, or Shiller B ratios, give, some insight into this in. That post in. Investors. Called investing, in a Raging Bull it's. In the stock series I just, put excuse, me I. Just. Put a link. To a post. I came across. Very. Well, done where the guy analyzes. Where. The the, various, p/e ratios, were at, the beginning of drops and there's, no predictive. No. Predictive, correlation. There to, be had so you just you just, can't. Know I, also, have a post called why don't like. Dollar. Cost averaging, and. In. Summary. Dollar. Cost averaging, is is the idea of putting in a little bit of money at a time over a period or a period of time the. Problem, with that is, that unless, the market conveniently. Goes down while you're doing it you will have been giving up gains rather than avoiding, losses and. The thing that really bothers me about it is at the end of your period investment. Period where you have finally deployed, all of your money, who's, to say the. Next day isn't, the day the market takes its big plunge, so. You have. $120,000. You wanted to play and you say I'm going to do it over the next 12 months and. I'm gonna put $10,000, a month in. And. I'm gonna avoid that risk you're, not avoiding the risk you're just delaying. The risk until you put that final 10,000, in now, if you get lucky in the market plungers you'll, pat yourself on the back but understand, that's only luck because nobody knows where. The market is going there's, a saying that the best time to have invested. Was. Yesterday. And. The second best time is today. It's. Time in the market is more powerful than tying, to time the market, time. In the market is more powerful, than trying, to time the market well. Said I like that. So. We, have one more question for Jim but for folks who, have live, questions, feel free to line up at the mic we, also have a Dory at go slash Jim, - dory, so. My. Last question before we turn it over to live questions, is there. May be folks in this room who have a new year's resolution to. Get their financial house in order and, they. May be one, of the folks who you. Know have a lot of cash. And checking, or savings or, they just are. So overwhelmed, by the stuff that they don't even know where to begin so what, would you say are the just the key takeaways, they should focus on when they leave this room. Well. Again. I would encourage anybody in that but if you're sitting on on that much cash and I'm assuming that that amount. Of cash represents. A large part of your not worth as, money is relative, but if, you're sitting on, $100,000. As an example and that is a large part of your net worth that. Indicates, that you're not comfortable investing and that's fine so the first thing you should do is educate, yourself and. You, can start with my blog or my book, and. See if that resonates and, go, from there if, you find it doesn't resonate then, there are a lot of other sources. Out there but, educate, yourself first, but. If you're prepared to. And some, of the posts that I referenced, are in the stock series. You, can read about investing, in a Raging, Bull you can read about dollar cost averaging. But. Once you decide to invest in stocks you have to accept the fact that, the market is volatile, the. Market, at some point the market will go down now, whether it goes down 10%, and continues going up 24. Who knows, nobody, knows but. The market, you can count on it being volatile, and at some point it will go down and you have to come to terms with that and you. Have to be absolutely. Sure that, when, that happens, not if but when you. Don't panic because. The only way you lose, is, if you panic and sell at the bottom. Now. Trust. Me when I tell you because I've lived through a few of them when. The market, is taking one of its dives it's, ugly it's, painful, it's scary, it's easy to sit here now and say well I'll stay the course but. It's not so easy to do it when it's happening so. The first thing you need to know is, her first thing you need to resolve it seems to me in your own mind in your own heart and your own gut is. That when, that happens, that. Selling. Is not an, option, it's, just simply, not an option, now. In my world I divide, the. Times, in our life between, wealth, accumulation. And wealth preservation stages. In. A more traditional point, in time that might have been well when you're young and you're working that's your wealth. Building. Stage and then, you get to 60. Or 65, and you retire wealth preservation but. These days people step, in and out of careers on a routine basis, so, you will go from wealth preservation to. Wealth building and back several, times I know I did in my career when.
You're Doing that there, are two ways you can mitigate the. Volatility, of the market and actually use it to your advantage when. You, were in the wealth building, stage. You. Have earned income and, if you're aiming, to be financially, independent a, large portion, a portion, of that income, is being diverted into investments, so. That means on a regular, basis, you are putting substantial. Amounts of your income into the market that, by. Extension, means when the market drops you're getting to buy things on sale now. You're not gonna try to time this because we know we can't do that well, what it does mean is that when the market drops you. Should celebrate. Because oh I'm. Getting to buy when I put that extra thousand, dollars or ten thousand or whatever it is in each month I'm getting. More shares, in, my VTS ax than, I would have gotten otherwise the. Volatility, works to your advantage in, that fashion so. You sleep easily at night because you don't care what mr. markets, gonna do now. When. You move to the wealth preservation stage. You, no longer have that income, stream to smooth the ride and that, in my world is when you add bonds, and. Bonds. Become like ballast, in your sailing ship where. Your where your flow, of income was before, now. You're gonna replace that with the ballast of bonds, and that. Means that, when the market, plunges, the stocks plunge, and. You reallocate. To stay, at whatever allocation. You've chosen you'll. Be selling bonds which you've gone up in as a percentage, of your portfolio, let's. Say as I do at the moment you have 30% bonds. 70%. Stocks. Well. When stocks plummet, that percentage, of bonds is gonna go up you, sell some of those bonds and you're buying those stocks at, lower prices, just. Like your. Cash flow was allowing you to do it before when. Stocks go back up again and suddenly. That percentage, of stocks starts. To our way or, you want it to be it gets above 70, you start selling some of those off to replenish your bonds with, those two strategies you, no longer have to care, whether. Market, is going up or down, because, you know that over time the, market is going to go up and you've, eliminated the, concerns with volatility, so. I would embrace those, two concepts. Understand. That you don't, ever, sell. In a panic just because it went down that, is simply not an option that you will ever consider, and then. Depending, on which stage you're in either. Use bonds, or use cash flow to smooth the right. We're. Ready to go to some, live questions. Thank. You for coming so. I just had two questions about the future so number one. You. You are addressing the wrong guest. Earlier. In, the talk you mentioned a very simple sentence what. Do you do with your money put, it in VTS, ax more. Similar fund so, that one sentence it seems like you can do that in a matter of a few, clicks, individual. So, my.
Question Is, you. Know about. The, financial advisors, system, the the kind of the larger system where you're calling, someone on the phone and having them essentially, do the exact same thing my. Question is how do you see that changing as, the, world becomes more financially, educated, and. Then as a corollary, to that. The. Broader, system. If everyone, kind, of buys. Into this indexing, idea, are. There, any systemic, risk to be you know the entire world investing. In an index. Okay. So. With. Financial, advisors. I. Think. In fairness to financial, advisors, they. Can be useful in a wide range of. Subjects. Other than making your investment, choices for you but. I have one, of the the chapters, in my book and one of the posts in the stock series is why I don't like investment, advisors because. If you embrace the simplicity, that. That. I suggest. Then. From. At least an investment, point of view, as. You well, point out why. Would you need an advisor to do what you can do in a handful, of clicks, and. When. I gave my talking, at Chautauqua, when I was preferring, that talk for last year I took. A little different approach than they had taken before, and I was, thinking about, the. Content of my book and the content, of my blog and they're trying to boil it down into, one line or, one phrase and really what I came up with is my, advice is by. VTS ax, buy, as much as you can by. Whenever buy it whenever you can and hold it forever and it's really that simple, and as you say it's, a matter of a handful, of clicks, the. Second question and this is this is one that's that's. In, the financial, community a fair amount is well, what if everybody embraces indexing. What's. That going to do to markets, and the, problem that suggested, is that, indexing. Simply buys every, stock where, stock pickers, whether they're individuals, or fund, managers. They're. The ones who are trying to evaluate companies. And thereby creating. A trading. Mechanism that, that, looks, as some sort of objective. Objective. Parameters and, comes, up with the values, and. Is. There a danger to that going away as everybody, embraces, indexing. I'm. Not concerned about it I don't know if there's a danger or not because it's hypothetical, I'm not concerned about it though because indexing. I think at the moment accounts. For. 20-25. Percent of the market. It. Is growing more, people are embracing the idea but. I think as it if, it continues, to grow what, I would. What. I think will happen is is, that sliver, of. Active, management becomes, narrower, and more and, more people are indexing, the, opportunity. To actually outperform. The index will start to increase. And. As that happens, you'll have some of those active managers. Posting. Success, stories, and that'll begin to tilt it the other direction, and. I think the other reason I'm not concerned about indexing, taking over the world is because. As I mentioned earlier. And and answering, one of your questions. It. Is counterintuitive. That. It is so powerful and, we. It's, part of human nature to. Want to think that you can out for its, it's. Part of human nature to want to best, of the benchmark, I still, have the disease every night, again I'm still trying to to, pick. Stocks so. I think that. Aspect, of human nature is is, also. Gonna keep it indexing. From ever taking over the world does that help it all yes, thank you my, pleasure thank you. Thank. You. But, do you see any. Advantage to trying to diversify away, from, the sp500. And think, about either. Like global markets or bonds, or commodities. Well. Well, bonds, as I mentioned I think you. Add bonds, depending, on who had what point in your life you are as ballast, for. Your investment, ship and I don't know than that I don't see, a role for bonds, what's. Interesting to me about that question, is, the S&P 500 as, the name suggests owns. Basically. The 500, largest American. Companies. VTS. Ax which is a total stock market index, fund owns, and it, varies but about thirty six hundred companies. When. I first started investing, and. It. Was before such things existed, or they were just coming on stream, the. Idea being diversified was. Because, you, were most the vast majority people were picking individual, stocks they. Had to because that was available there were some mutual funds out there, but. The advice given to individual, investors then was you know you want to pick. Seven. Eight nine maybe, ten industries, and, inside. Those industries, you want to pick two or three companies and, then. You have a diversified, portfolio, because. You really can't, physically. And, mentally. Follow, more, than 20 25, maybe the outside 30 companies, and that.
Was Considered, to be a well diversified, portfolio. So, when somebody says to me do I need to diversify beyond. Beyond, 500. Companies. Mm, yeah. I think you're there I think, you're there now the international, aspect, of it I'm a little at odds with the rest of the world or most of the rest of the world the. Advice that most people give is that in addition to buying the, S&P 500, or VTS ax which. Are US companies, you. Need to buy funds that that put you into, the. Rest of the world internationally. From other countries. Vanguard itself. Gives that advice I. Don't. Buy it at least not, yet the, u.s. is still very dominant, in the world economy it will continue, to be dominant for the foreseeable, future but more, importantly, those, companies, in, the index in the S&P. 500. Especially. In the the top 100, of those companies Google. Is an example. Our. International, companies by definition so. If you're investing in the S&P 500 and, of course the S&P 500 is. 80%. Of VTS, ax you. By definition are, invested. In the world. Before. We take our next live question, I want to go to the top voted questions on, the Dory so. The question is from, Stephanie here in Chicago, she said, a lot of Googlers receive a significant, portion of compensation. In Google stock, oftentimes. There are strong camps. Who never sell a share or those who. Sell it all and diversify, immediately, what, are your thoughts on holding, the Google shares since we're all extremely invested in the success of Google well. That's a politically, loaded question. Somehow. I think I should say old, Google. But. That's actually not my opinion and, then and that has nothing to do with by the way Google, stock or, or. What. I see is the future of Google, the. Problem. I have is is in, looking, at the question. When. She says we're all extremely invested in the SEC the success of Google that's a great thing. But. That's also an emotional thing and I, think you need to separate, your emotions from your investing. So. You, all want to see Google go, forward and succeed and prosper it, is your, career it. Rates, your paychecks, and. Therein, lies the problem because. When, you were also invested, in Google you have more and more eggs, in that one, basket. I. Don't. Know what the future of Google is and, nobody. Really does everybody, in this room presumably, and in the organization. Is striving, to make that, future. Wonderful. And, and, profitable, going. On indefinitely, and have done a wonderful job so, far but. The world is filled with people or trying to eat your lunch I. Think. Back to General Motors so when I was a kid. 1960s. General, Motors who, was, kind. Of had, a rough go of it in most, of your lifetimes, in the, 1960s. The federal government, was on the verge of breaking up General, Motors. Because. Nobody. Else could compete with them General. Motors was so dominant, that. The government, was concerned that no, other car. Company, would be able to compete and they, would have to step in and they were specifically, talking. About splitting, off the chevrolet division, which was just, huge and dominant, well, of course history, tells us two things it tells us one the government chose not to do that and two. That. They didn't need to worry. Because. The world was filled with places with. Other. Companies, waiting. To eat General, Motors lunch, the moment, they, slipped up or. Simply. The moment the competitor, figured out a better way to do it so you, have to be very careful, in putting all of your eggs into, the same basket, where, you work. Going. Back to the question the gentleman asked earlier about the sp500, I would. Rather own the S&P 500.
Or. At least have the bulk of my my, net worth in the S&P 500 because, now I don't have to guess who's gonna win. Because. The losers, fall off. And the, winners go on prosper, one of the beautiful things about the index is what I call soft being it is self cleansing and by. That what I mean is that. If. You, look at any. Specific. Company, in that index. You. Can only lose a hundred percent of that company. But. Any other company, that index and Google is a wonderful example, of this over the last few decades can. Grow exponentially, there, is almost no limit to how far it can grow so. That's kind of a winning combination. The losers fall off and they don't actually go to a hundred percent before, they get delisted, but, the losers, drift away and you, are continually, getting new blood added to it as new companies, come up and. You get to benefit, from those who succeed, and all, those companies are filled with people who, are working hard to make sure that their company succeeds, this investor I don't have to figure out who the winner is gonna be because. I own the mob. And. We have time for one more question. So. I was gonna ask two but. I, think. They're quick the. Retirement, retirement, day funds thoughts, on those, target. Retirement date funds so, automatically, adjusting, allocations, as you're close to retirement, thoughts. On that or do you think you should just do allocation, yourself. Through the, ferries of bonds, and Vanguard. Funds on, your own and. Then the, second was just really about and what scenarios would you find, it helpful to use a financial advisor I find doing it on your own is great but at some point you want some kind of reassurance, you're doing it well enough, for investment, picking but you have to go to someone to get insurance. Okay. So a. Target, retirement fund - just, to kind of quickly explain, what that is there are mutual funds out there Vanguard. Has them which, are called target, date retirement, funds or target retirement, funds and the idea is, that. In. Its it's, what's. Called a fund of funds which means it is a mutual fund that, holds a bunch of other funds inside, it usually five, or six different funds. And. With a target retirement, fund you pick a retirement. Date and. You buy the fund and as, the gentleman just indicated, you can hold it forever and, automatically. The. Closer you get to that retirement, date the, more conservative. The, fund allocation, will become that, is to say typically. The more bonds, they will add so. The idea is you never have to adjust your allocation, as.
You Get to it, now. You can adjust so. Some people say well gee I might want to be more aggressive or, less aggressive, than the retirement. Fund. Well, you can adjust that by if you want to be more aggressive, just, pick one with. A retirement date that's actually further out than your own, anticipated. In retirement if, you want to be more conservative, you, can just bring that retirement date in closer. Than. You are actually planning to retire. And. The idea is that you never have to do anything again. It. Is not a bad approach you really want to invest in a way that is completely, hands-off, or you really never have to think about it this, is not a bad way to go and in fact I have a post on this and the stock series, and, I think it's a chapter in the book I'm not sure if I put it in the book or not but, there's a post in the stock series where I talk about these things it's not a bad way to go. What. I suggest, to people is that if you can read through my stock series, and you're, comfortable with what you read or you read my blog or. My book rather and you're comfortable with what you read it, is less expensive, to, simply. Do the allocation yourself. And it's. Not very hard it doesn't take much time and that's the way I would encourage. You to go but, on the other hand if you read through the stock series or, you start reading through and you say you know what I, just really, don't wanna. Just, this, is just not my thing. And. There are topics by the way in my life that, I would have that reaction to then, just skip down to the post about tired tired retirement. Funds and and you, can be done and you won't, it. Won't be a bad thing to do. And. The second thing real quickly in terms of financial, advisors. Again I don't think you need them if you follow an approach like mine which is simple. Investing, you, don't need them for that but. There are other aspects. Where where. They can be useful, the problem with financial advisors is while there are good ones. There are a lot we're not and they're not for a couple of reasons one. Is simply they're not that competent, or, the other a, little more insidious is that their.
Interests. Are not necessarily. Aligned with what's best for you so. If. You read my my post on why I don't like Investment, Advisers one of the conclusions, I come to is by the time you know enough to. Choose. An investment, advisor why'd wisely. Had. You invested that time learning in yourself you would know enough to do it on your own, thank. You thank. You we're out of time thanks for coming to Google Chicago, it's been a pleasure having it it's been a pleasure being here. You.