2749: Stocks - Part V: Keeping It Simple, Considerations And Tools by JL Collins on Investment Advice

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[00:01:07] at evernorth.com slash wonder. This is Optimal Finance Daily, episode 2749. Stocks, part five.

[00:01:16] Keeping it simple, considerations and tools by JL Collins of jlcollinsnh.com. And I'm your host

[00:01:24] and personal finance enthusiast, Diana Merriam. This is actually one of multiple shows in our

[00:01:30] network covering different topics like personal development, health, relationships, and your work

[00:01:35] life. So if you like narration style podcasts, be sure to search for Optimal Living Daily wherever

[00:01:42] you're hearing this and check out our other shows. But for now, let's get right to it and

[00:01:47] continue optimizing your life. Stocks, part five. Keeping it simple, considerations and tools by JL

[00:01:59] Collins of jlcollinsnh.com. Simple is good. Simple is easier. Simple is more profitable.

[00:02:09] What I'm about to share with you is the soul of simplicity. With it, you'll learn all you need to

[00:02:14] know to produce better investment returns than 80% of the professionals and active amateurs out

[00:02:20] there. It will take almost none of your time, and you can focus on all the other things that make

[00:02:25] your life rich and beautiful. How can this be? Isn't investing complicated? Don't I need

[00:02:31] professionals to guide me? No, and no. Since the days of Babylon, people have been coming up with

[00:02:38] investments, mostly to sell to other people. There's a strong financial incentive to make

[00:02:43] these investments complex and mysterious. But the simple truth is the more complex an investment,

[00:02:49] the less likely it is to be profitable. Index funds outperform actively managed funds in large part

[00:02:56] simply because actively managed funds require expensive active managers. Not only are they

[00:03:01] prone to making investing mistakes, their fees are a continual performance drag on the portfolio.

[00:03:08] But they are very profitable for the companies that run them, and as such are heavily promoted.

[00:03:14] Of course, those profits come from your pocket. So do the promotion costs.

[00:03:19] Not only do you not need complex investments for success, they actually work against you.

[00:03:25] At best, they're costly. At worst, they're a cesspool of swindlers.

[00:03:30] Not worth your time. We can do better. Here's all we're going to need. Three considerations

[00:03:35] and three tools. The three considerations. You'll want to consider in what stage of your

[00:03:43] investing life are you? The wealth building stage or the wealth preservation stage,

[00:03:49] or most likely a blend of the two. What level of risk do you find acceptable? And is your investment

[00:03:55] horizon long term or short term? As you've surely noticed, these three are closely linked. Your level

[00:04:03] of risk will vary with your investment horizon. Both will tilt the direction of your investing

[00:04:08] stage. All three will be linked to your current employment and future plans. Only you can make

[00:04:15] these decisions. But let me offer a couple of guiding thoughts. Safety is a bit of an illusion.

[00:04:22] There's no risk-free investment. Don't let anyone tell you differently. If you bury your cash in

[00:04:28] the backyard and dig it up 20 years from now, you'll still have the same amount of money.

[00:04:33] But even modest inflation levels will have drastically reduced its spending power.

[00:04:38] If you invest to protect yourself from inflation, deflation might rob you or the other way around.

[00:04:45] Your stage is not necessarily linked to your age. You might be planning to retire early.

[00:04:52] You might be worried about your job. You might be taking a sabbatical. You might be returning

[00:04:57] to the workforce after several years of retirement. Your life stages may well shift

[00:05:02] several times over the course of your life. Your investments can easily shift with them.

[00:05:08] FU money is critical. If you don't yet have yours, start building it now. Be relentless.

[00:05:15] Life is uncertain. The job you have and love today can disappear tomorrow. Nothing money can buy is

[00:05:22] more important than your fiscal freedom. In this modern world of ours, no tool is more important.

[00:05:28] Don't be too quick to think short-term. Most of us are or should be long-term investors.

[00:05:36] The typical investment advisor's rule of thumb is subtract your age from 100 or 120. The result

[00:05:43] is the percent of your portfolio that should be in stocks. A 60-year-old should by this calculation

[00:05:49] have 60% in conservative wealth-preserving bonds. Nonsense! Here's the problem. Even modest inflation

[00:05:57] destroys the value of bonds over time, and bonds can't offer the compensating growth potential

[00:06:02] of stocks. If you're just starting out at age 20, you're looking at perhaps 80 years of investing,

[00:06:09] maybe even a century if life expectancies continue to expand. Even at 60 and in good health,

[00:06:16] you could easily be looking at another 30 years. That's long-term in my book. Or maybe you have a

[00:06:22] younger spouse, or maybe you want to leave some money to your kids, grandkids, or even to a

[00:06:27] charity. All will have their own long-term horizons. Once you've sorted through your

[00:06:33] three considerations, you're ready to build your portfolio. And you'll need only these

[00:06:38] three tools to do it. See, I promised this would be simple. Number one, stocks. VTSAX or Vanguard's

[00:06:47] Total Stock Market Index Fund. You've already met this fund in earlier posts of this series.

[00:06:53] It's an index fund that invests in stocks. Stocks over time provide the best returns, and with VTSAX,

[00:07:01] the lowest effort and cost. This is our core wealth-building tool and our hedge against inflation.

[00:07:07] But as we've discussed, stocks are a wild ride along the way, and you got to be tough. Number two,

[00:07:14] bonds. VBTLX or Vanguard's Total Bond Market Index Fund. Bonds provide income, tend to smooth out the

[00:07:24] rough ride of stocks, and are a deflation hedge. Deflation is what the Fed is currently fighting

[00:07:30] so hard, and it's what pulled the US into the Great Depression. Very scary. The downside for

[00:07:36] bonds is that during times of inflation and or rising interest rates, they get hammered. And

[00:07:43] number three, cash. Cash is always good to have in hand. You never want to have to sell your

[00:07:49] investments to meet emergencies. Cash is also king during times of deflation. The more prices drop,

[00:07:56] the more your cash can buy. But idle cash doesn't have much earning potential, and when prices rise,

[00:08:02] inflation, its value steadily erodes. We tend to keep ours here, VMMXX. This is a money market fund.

[00:08:12] Now we also keep some in our local bank. If you prefer an online bank like ING works fine too.

[00:08:18] So that's it. Three simple tools. Two index mutual funds and a money market and or bank account.

[00:08:26] A wealth builder, an inflation hedge, a deflation hedge, and cash for daily needs and emergencies.

[00:08:33] Low cost, effective, diversified, and simple. You can fine tune the investments in each to meet

[00:08:40] the needs of your own personal considerations. Want a smoother ride? Willing to accept a lower

[00:08:46] long-term return and slower wealth accumulation? Just increase the percent in VBTLX. You just

[00:08:57] listened to the post titled, Stocks Part 5, Keeping It Simple, Considerations, and Tools

[00:09:04] by JL Collins of jlcollinsnh.com. And I'll be right back with my commentary.

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[00:10:28] visit acorns.com. Looking to part ways with complicated, expensive, and uncertain shipping?

[00:10:34] Then give your business the edge it needs with USPS Ground Advantage shipping from the United

[00:10:41] States Postal Service. Keep everything simple with clear upfront pricing and no unexpected

[00:10:47] surcharges. Keep things affordable with some of the lowest prices out there. And keep it all

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[00:11:00] USPS.com slash ADVANTAGE. USPS Ground Advantage. Simple, affordable, reliable.

[00:11:10] I procrastinated in my 20s when it came to investing because I felt like I didn't understand

[00:11:15] enough about investing to do it confidently. And when I would try to learn on my own,

[00:11:20] it really intimidated me. If you've been listening for a while, you know that J.L. Collins' book,

[00:11:25] The Simple Path to Wealth, is what cured me of my investing fears. I also realized over time

[00:11:32] that I don't need to know everything about investing in order to properly save for retirement.

[00:11:37] And even now, as someone who reads and talks about money every day, I still don't know everything.

[00:11:42] Sometimes I think the financial services industry purposely makes things complicated

[00:11:47] so that we're willing to pay the high management fees for a financial advisor.

[00:11:51] But it doesn't have to be that way. We can educate ourselves enough to be confident about our

[00:11:56] financial choices. And then if we do hire a financial advisor, we'll be in a position to

[00:12:01] ask the right questions and feel more confident that we're working with someone we can trust.

[00:12:06] The fact that you're listening to this podcast is a great sign that you have a bright financial

[00:12:11] future ahead of you. But that should do it for today. Have a great rest of your day,

[00:12:15] and I'll see you tomorrow where your optimal life awaits.