JL Collins Part 1: The Simple Path vs. The "Optimal" Path

Summary

Afford Anything Podcast: JL Collins Part 1 – The Simple Path vs. The "Optimal" Path

Hosted by Paula Pant | Cumulus Podcast Network
Release Date: July 11, 2025

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Introduction

In this episode of the Afford Anything podcast, Paula Pant welcomes back JL Collins, renowned author of A Simple Path to Wealth, for a deep dive into investment strategies and financial decision-making. Skipping the basics for returning listeners, Paula and JL engage in an advanced-level discussion, challenging conventional investment paradigms and exploring the psychology behind financial choices.

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Simple Path vs. Optimal Path

[00:26 – 05:55]

Paula introduces the core topic by contrasting the "Simple Path" advocated by JL Collins with the "Optimal Path," which often involves more complex investment strategies. She brings up the Efficient Frontier—a concept Paula assumes JL is familiar with, but to her surprise, JL admits, "I think I've heard the phrase, but I can't tell you what it is, so I can't speak to it." [01:11]

JL Collins’ Perspective: JL argues that the simplest investment strategy is often the most effective. He emphasizes the importance of minimalism in portfolio management, stating:

"I would argue that the most optimal is the simplest. So I would disagree with the idea that if you make it more complex just because you have more money, that you're improving your performance." [02:23]

He contends that while more complex strategies like Paul Merriman's four-fund portfolio might offer marginally better returns on paper, the real-world execution often falters due to human behavior. JL believes that sticking to a straightforward approach, such as investing primarily in VTSAX, reduces the risk of poor performance stemming from frequent portfolio tinkering.

Key Points:

• Simplicity Over Complexity: JL emphasizes that the simpler financial strategies are easier to maintain and less prone to human error.
• Behavioral Economics: He underscores that human nature tends to resist the disciplined rebalance required by more complex investment strategies, potentially negating any theoretical advantages.

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Listener Questions and JL Collins’ Responses

[06:00 – 34:55]

Paula introduces listener-submitted questions, allowing the audience to explore specific investment concerns directly with JL.

1. Efficient Frontier & Risk Parity
   Ricky’s Question: Explanation of the Efficient Frontier.
   Patrice’s Question: Opinion on the Risk Parity approach championed by Frank Vasquez.

   [07:02 – 09:57]

   JL admits unfamiliarity with Risk Parity but acknowledges its complexity, suggesting that complicated strategies often lead to increased costs and reduced effectiveness:

   "The more complicated things get, the more expensive they tend to get. And in my world way of thinking, the less effective they become." [08:14]

   However, he recognizes the merit in strategies that aim to mitigate sequence of returns risk, particularly during retirement.

2. VTSAX vs. VTI vs. Other Index Funds
   Listener’s Query: Does it matter if one invests in VTI over VTSAX?

   [14:25 – 35:22]

   JL clarifies that VTI (an ETF) and VTSAX (a mutual fund) essentially offer the same exposure to the total stock market, differing primarily in trading flexibility. He extends the conversation to other providers like Fidelity and Schwab, affirming that their total stock market index funds are equally valid choices.

   "If you’re comfortable with Schwab or Fidelity or somewhere else and they have that absolutely no problem, go for it." [15:03]

   Key Insights:

   • Flexibility vs. Commitment: While ETFs like VTI offer trading flexibility, mutual funds like VTSAX provide simplicity for long-term holders.
   • Consistency in Performance: Over extended periods, both VTI and VTSAX track the total stock market similarly, making the choice largely a matter of personal preference and convenience.

3. US Stocks vs. International Diversification
   Listener’s Question: Should investors consider more allocation to international stocks if the US loses its status as a world power?

   [28:09 – 34:55]

   JL acknowledges the importance of international diversification but maintains a cautious stance for US investors:

   "My opinion of not needing international stocks might be the single most controversial opinion I have, the one that is most at odds with the vast majority." [28:35]

   He explains that for international audiences, investing in a world fund is advisable. However, for US investors, the dominance of the US in the global market currently justifies a heavier allocation to US stocks. JL anticipates that as other economies grow, the US's share in global equities might decline, at which point shifting towards a world fund would make sense.

   Key Points:

   • Home Country Bias: US investors already hold a significant portion of global equities through US indices.
   • Future Shifts: As global markets evolve, the allocation strategy should adapt accordingly, but such shifts are gradual and not immediately necessary.

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Self-Cleansing Nature of Index Funds and Historical Examples

[22:06 – 35:22]

JL elaborates on the "self-cleansing" feature of index funds, which automatically adjust to economic changes by reallocating investments from declining sectors to emerging ones. He dispels criticisms about tech dominance in indices by citing historical examples where different sectors led the market at various times.

• Sears and Blockbuster:
  JL references companies like Sears and Blockbuster, which were once market giants but eventually faded, illustrating the inevitable turnover in dominant firms.

  "Companies come and go, sectors rise and fall, and the index fund takes care of that for you." [26:28]

• Historical Dominance Shifts:
  He highlights that just as tech once wasn't always dominant, current dominant sectors will evolve, and index funds inherently adjust to these shifts without requiring active intervention from investors.

Key Insights:

• Dynamic Allocation: Index funds continuously adapt to market conditions, providing a diversified and resilient investment vehicle.
• Long-Term Perspective: Investors benefit from not having to predict which sectors or companies will dominate the future.

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Bonds and Portfolio Decumulation

[35:22 – 44:56]

The conversation transitions to the role of bonds within an investment portfolio, particularly during the decumulation phase (retirement).

JL Collins’ View: JL posits that bonds should be incorporated primarily when one starts living off their investment portfolio. During the accumulation phase, focusing on equities offers the highest growth potential, while bonds serve to stabilize income during retirement.

"As the market plunged back in February, March, whenever it was went down about 20%, well, you would have picked up shares at a bargain price. That's how it smooths the ride for you." [38:58]

He discusses the 2022 bond market performance, noting it as one of the worst years for bonds, yet maintains confidence in their long-term role in a diversified retirement portfolio.

Key Points:

• Purpose of Bonds: Provide stability and reduce volatility during retirement, contrasting their role during the wealth-building phase.
• Market Fluctuations: Investors should not panic during bond market downturns but recognize their long-term benefits.

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Diversification and the One-Fund Philosophy

[22:06 – 35:22]

Addressing the common concern about diversification, JL defends his one-fund approach by highlighting the extensive coverage of total stock market indices like VTSAX, which includes approximately 3,600 companies across various sectors.

"VTSAX holds something like 3,600 different publicly traded companies. You own VTSAX and in every company, 3,600 companies, from the factory floor to the CEO, they're working to make you richer." [48:55]

He contrasts this with outdated strategies where investors held only 15-20 individual companies, arguing that such methods are insufficiently diversified and risky.

Key Insights:

• Broad Diversification: A total stock market fund inherently provides broad exposure, mitigating the risks associated with individual stock performance.
• Simplicity and Effectiveness: A one-fund portfolio simplifies investing while ensuring comprehensive market coverage.

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Conclusion and Key Takeaways

[51:09 – 57:32]

Paula summarizes the episode with three key takeaways:

1. Simple Beats Optimal: JL Collins advocates for simple investment strategies over complex, theoretically optimal ones due to the latter's susceptibility to human error and execution challenges.

   "The most optimal is the simplest. ... [Simple Path] is more reliable and certainly more simply." [53:48]

2. Index Funds are Self-Cleansing: Broad-based index funds automatically adjust to economic shifts, ensuring that investors benefit from the rise of new dominant sectors without needing to actively manage their portfolios.

   "Index funds are self cleansing. They automatically adapt to economic changes." [55:15]

3. Sufficient Diversification: Holding a total stock market index fund provides extensive diversification across thousands of companies, rendering the need for additional diversification strategies unnecessary for most investors.

   "By buying one total stock market fund you get 3,600 companies. ... That's the most important way to spread the message of FIRe." [56:24]

Paula encourages listeners to follow the podcast for part two, where they will explore more advanced topics such as retirement withdrawal strategies, business ownership versus public market investing, and personal stories from JL Collins' journey to financial independence.

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Notable Quotes:

• JL Collins on Simplicity:
  "The most optimal is the simplest." [02:23]

• On Index Funds' Adaptability:
  "Companies come and go, sectors rise and fall, and the index fund takes care of that for you." [26:28]

• Regarding Diversification:
  "VTSAX holds something like 3,600 different publicly traded companies." [48:55]

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Final Thoughts

This episode underscores the significance of simplicity in investment strategies, the inherent adaptability of index funds, and the sufficiency of broad diversification through total stock market funds. JL Collins' insights challenge investors to prioritize long-term discipline over chasing marginal gains through complex portfolios, emphasizing that behavioral consistency often trumps theoretical optimization in achieving financial independence.

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For those eager to continue the conversation, stay tuned for Part 2 of this interview, where Paula and JL delve deeper into retirement strategies, international diversification, and more.

Transcript

[Paula Pant]

If you're a longtime listener of this podcast, you already know J.L. collins, the author of A Simple Path to Wealth. We're going to interrogate him today. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. This show covers five financial, psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Welcome, J.L.

[J.L. Collins]

Thank you. Thanks for having me. It's a pleasure to be here with you, Paula.

[Paula Pant]

It's great to be here with you. This is your second time on the show.

[J.L. Collins]

I know.

[Paula Pant]

And since this audience already knows you, we're gonna skip over the basics because we talked about that in your first appearance.

[J.L. Collins]

Yeah, that works.

[Paula Pant]

We'll put a link in the show notes for anybody who doesn't yet know you or your material. We'll put a link in the show notes to the first interview that we did so that people who are newer to this community or who are unfamiliar with your work can get briefed on the basics there. But we're gonna dive right in and.

[J.L. Collins]

Start grilling me from the get go.

[Paula Pant]

Exactly.

[J.L. Collins]

Yeah.

[Paula Pant]

We're gonna go advanced level right from you're Mr. Vtsax and chill is how a lot of people regard you. Are you familiar with the Efficient Frontier?

[J.L. Collins]

No.

[Paula Pant]

You're not?

[J.L. Collins]

No.

[Paula Pant]

Okay. Really? You've never heard the phrase?

[J.L. Collins]

I think I've heard the phrase, but I can't tell you what it is, so I can't speak to it.

[Paula Pant]

Oh, interesting.

[J.L. Collins]

But if you can brief me quickly, we can delve into it.

[Paula Pant]

Essentially, the concept is that what you teach is the simple path, which is different from the most optimal path, that there is a distinction between what is simple and what is optimal. And so if a person is a beginner or if they're intimidated by the market, or if they have assets of less than $100,000, sure, it makes sense to begin with a simple approach because it gets you in the game. But once you are an enthusiast, you're excited about this stuff, you're ready for complexity, or you have a larger portfolio, let's say over 100,000, maybe you have 500,000, maybe you have a million. It makes sense to take the time to do something that is a bit more optimal. And so the Efficient Frontier is a curve, basically, that was designed by Harry Markowitz to plot the asset allocation that would be used for determining the mix of various types of asset classes that should be in a person's portfolio.

[J.L. Collins]

Got it. So that Makes sense. And I would argue that the most optimal is the simplest. So I would disagree with the idea that if you make it more complex just because you have more money, that you're improving your performance. So when I wrote the Simple Path to Wealth, I wrote it basically for my daughter. I wrote it for people like her who are very smart, but they have better things to do with their life than obsess about their investments. And the beauty of the Simple Path and the fact that it's so effective is that you just have to understand a couple simple things and implement a couple of simple moves and then sit back and forget it. Now, as I've written the book and I've written the blog, I've discovered I have two audiences, right? I have people like her who respond to it at that level and figure it out and engage it and step away. And then I have people like you're describing who love to tinker. And I've learned I'm never going to dissuade people who want to do that from doing it. But I would be willing to bet that if you got 20 years and you look at my daughter, who's not tinkering, and you look at those who are, the performance will fall on her side of the ledger. Because the more you tinker, and this, by the way, not just me saying this, these people like Jack Bogle saying it. The more you tinker, the worse your results are going to be. Based on the way you described it. I'm not a fan of the efficient frontier.

[Paula Pant]

There are those who would argue it doesn't take a whole lot of additional time and it doesn't require tinkering as you describe it. It simply Requires an extra 15 minutes and a commitment to adding one or two additional asset classes to the portfolio. Maybe some small cap value, a little bit international, but a couple of asset classes. 15 minutes can make a big difference over the long term.

[J.L. Collins]

What you just described there is what Paul Merriman talks about. Paul's a friend of mine. Paul and I have debated this, actually, on a podcast. I think Paul's an extremely smart guy and he's done the research, and he has, as I recall, a four fund portfolio, and it includes international small cap. He tells me that it outperforms my simple path of just doing BTS X and maybe a little bit of bonds. And I take Paul at his word. I believe that is probably true. The challenge is I have enough trouble getting people to stay the course with just vtsax, right? The idea that somebody is actually going to take those four funds, faithfully rebalance them over the course of, say, 20 years, which is going to require them, by the way, to be selling the ones that are performing best to buy in the ones that are lagging. That just goes so much against human nature, from my experience, that I don't think anybody is ever going to execute that. So that's another reason that I'm not particularly in favor of it. So again, 20 years out, there will be tinkering that happens with that. Unfortunately, there's people who tinker even with the simple path just holding that one fund. Every time the market drops 5%, my social media and my blog light up with people who are in a panic. And should I sell now? Should I step to the sidelines? I just don't see people executing what theoretically might be a better approach.

[Paula Pant]

Would you agree with the statement that an approach like Paul Merriman's is mathematically better?

[J.L. Collins]

Yes, and I conceded that just now, and I conceded in my conversation with Paul, and I am trusting his numbers on that. Paul's a very trustworthy guy when he says, I've run the numbers and this is what they show mathematically, yeah, I accept that. I believe that's accurate stuff, but again, it's a matter of execution.

[Paula Pant]

All right, I usually don't do this, but because you are so well known in this community, I emailed some of my newsletter subscribers. Not all of them, but I emailed the 2000 Most Engaged newsletter subscribers. The ones who have opened the greatest volume of heavy hitters. Yeah, exactly. The ones who have opened the greatest volume of emails that I've sent. The software has, like, an engagement score. So the ones with the highest engagement are the ones that I emailed.

[J.L. Collins]

I'm in trouble now.

[Paula Pant]

And I said, hey, I am going to be speaking with J.L. collins. What would you like me to ask him?

[J.L. Collins]

So here we go.

[Paula Pant]

That first question, I want to give a shout out to Ricky because Ricky said, ask him what the efficient frontier is. So thank you, Ricky, for that question.

[J.L. Collins]

And Ricky for showing me up that I didn't know.

[Paula Pant]

But the next one comes from Patrice and Patrisse says, I think it might be neat to ask him what he thinks of the risk parity approach to investing. Is that something that you're familiar with as well, Frank Vasquez? Do you.

[J.L. Collins]

I confess I'm unfamiliar, but educate me.

[Paula Pant]

Risk parity is Frank Vasquez's approach to portfolio decumulation. Okay, so it is.

[J.L. Collins]

So I think I know what this is, but please go ahead.

[Paula Pant]

Yeah, it is different from the efficient frontier. It is more complicated than the efficient frontier. I myself really struggle to understand what risk parity is in its fullness. But it is a complicated approach to portfolio decumulation that is championed by Frank Vasquez.

[J.L. Collins]

So it's hard to speak to it because I'm not entirely sure I'm understanding what it is.

[Paula Pant]

Yeah, frankly, I'm not entirely sure I'm understanding what it is either.

[J.L. Collins]

But I will say to Patrice that just the fact that it is that complicated that we're having this part of the conversation, the more complicated things get, the more expensive they tend to get. And in my world way of thinking, the less effective they become. What? I thought you were talking about this idea that when you enter into retirement, you load up on more bonds than you might ordinarily do with the idea that you're trying to mitigate the idea of a sequence of returns risk, which simply means that the stock market goes against you in the early years of your retirement when you're living on the portfolio, and that would be a bad thing. And by loading up on bonds, you smooth that ride a little bit. And then as you get past that out five, 10 years, you begin to shift more and more into stocks because you're in a little safer ground and you could afford to be a little more aggressive. That is an interesting concept to me, and that is something that I think has merit. If that's what we're talking about, then, yeah, I think that's worth considering. But it sounds like it might not be.

[Paula Pant]

There's an approach to sequence of returns risk that is championed by Dr. Wade Pfau. Dr. Wade Pfau is a professor of retirement planning. He talks about an approach to sequence of returns risk in which, at the very beginning of retirement, you significantly decrease your risk exposure. You load up on a lot of cash equivalents and a lot of bonds, but then after you get into the first four or five years of retirement, you actually increase your equities exposure.

[J.L. Collins]

Yeah, just what I was talking about. And again, I think there's merit there.

[Paula Pant]

Yeah, exactly. So, yeah, that's the Dr. Wade Pfau approach. And actually, I advise my parents to do that, so I'm a big believer in that as well.

[J.L. Collins]

Well, and he's a very astute guy. I'm a fan. Yeah.

[Paula Pant]

It's funny how we're in this conversation associating all of these approaches with specific people. You know, where J.L. collins is the VTSAX and chill guy. That's a reputation we've Got Paul Merriman as the fore fund approach. We've got Frank Vasquez for Risk parody. We've got Dr. Wade Pfau for the sequence of returns, glide path. I guess because these are such heady concepts, it's attractive and tempting to associate each philosophy with a particular person.

[J.L. Collins]

Sure.

[Paula Pant]

To kind of humanize the idea.

[J.L. Collins]

Yeah. It's interesting to me because, of course, I'm a proponent of what Jack Bogle created. Right. And I started investing in 1975, which, coincidentally, was the year that Bogle created Vanguard and the first index fund that retail investors, normal people like the two of us and our listeners, could invest in. And I didn't know that at the time. It took me another 10 years to learn about it, and then I was slow to pick up on it and accept it. Sometimes people put my name in the same sentence with Bogles, and that's a high compliment for me, but I always say, if I've lit a candle in the darkness, Jack Bogle's a white hot sun. Right. I talk about the things that he pioneered, that he created. So I'm flattered to be associated with vtsax, but I'm not the guy who created the fund or the concept.

[Paula Pant]

Right. Did you meet Jack Bogle before he passed?

[J.L. Collins]

I didn't meet him personally. Kind of an interesting story. I was in Ecuador back in the day when I was doing chautauquas.

[Paula Pant]

Yeah. You and I were in Ecuador together.

[J.L. Collins]

We were. You were a speaker. I forget which year you. You were there.

[Paula Pant]

I was there for three years, yeah.

[J.L. Collins]

Okay. And so. Or the early years, 15, 16, something like that.

[Paula Pant]

Somewhere in that neighborhood. Ballpark.

[J.L. Collins]

But anyway, one of those years, Jane and I were. I can never remember the name of this little town, which is a shame because I loved it. There's a little coastal village in Ecuador that I particularly like. Haven't been there in a number of years, but I used to spend quite a bit of time. And she and I were there before Chautauqua. And we were checking out of the hotel, getting ready to travel into the mountains where we had chautauqua. And I thought, well, you know, before I leave the hotel and lose my WI fi, I'm just gonna check my email one last time. It happened, by the way, to be my birthday, November 1st. And so I open up my email, and I have one email, and it's from Jack Bogle. I actually have a blog post about this. I don't reproduce the email he sent me, but I do reproduce my response. And he's telling me that he's read the Simple Path to Wealth and very generous in his comments about it. I'm not a person prone to having heroes, but Jack Bogle is the hero. Jack Bogle's a fiscal saint. My wife teases me to this day. She said, you knew you were like a five year old at Christmas. You were so excited how that came about. Incidentally, is Taylor Larimore, who I believe is the guy who founded Bogleheads. Early on sent me an email and he had done a review of the Simple Path to Wealth on Bogleheads. Again, extraordinarily generous review and he sent me an email to share it and of course I responded and thanked him and that began a correspondence and he his personal friends or was when Jack was still alive. In the course of chatting back and forth with Taylor, I've always been curious. I said, does Bogle have any concept that the book is out there? And Taylor said, you know, I don't know, but next time I talk to him I'll ask. Reading between the lines, I think he took the time to look at the book and that generated the email that made my birthday. Wow. Yeah, probably the best birthday present I've ever had. Wow.

[Paula Pant]

That's incredible. Wow.

[J.L. Collins]

Pleased to be associated as Mr. BTS X, but even more so to be a messenger for what Bogle has created.

[Paula Pant]

I want to go back to some of the listener submitted questions and the next one actually happens to be about vtsax as well as Vanguard's a comparable etf. Vti.

[J.L. Collins]

I've never heard of that. Can you explain those to me?

[Paula Pant]

VTI is just.

[J.L. Collins]

Finally one that you don't have to explain.

[Paula Pant]

And so this question which was submitted from the listener says in the grand scheme of things, does it really matter if you invest in VTI over vtsax? I understand one is a mutual fund with one daily price and one is an index ETF with a fluctuating price, but I don't really understand why VTS X would be the preferred choice.

[J.L. Collins]

So a great question and it's one I get a lot and I'm actually going to expand that question a little bit in my answer.

[Paula Pant]

Okay.

[J.L. Collins]

To answer his question specifically, no, it's the same. It's the same portfolio. I am associated with VTSAX because I'm an old guy and it came before ETFs were out there. So I'm in VTSAX. There's absolutely nothing wrong with being in VTI and candidly, if I were starting now, I would probably buy VTI simply because it's a little simpler to buy and sell, but from a portfolio point of view. And if you're following the simple path to wealth, you are going to hold either of these things forever. So I don't care that when you buy or sell vti you get the price at that moment, like when you're buying or selling a stock. Whereas with the mutual fund you get the price at the end of the day, it doesn't matter to me because I'm holding this thing forever. But it's the same portfolio. Now the way I'm going to expand that is the other part of that question I get is I'm with Fidelity and I like Fidelity, or I'm with Schwab and I like Schwab. And they have a total stock market index fund, which is what BTS X is. Is that okay? And the answer is, yeah, absolutely. I have a preference for Vanguard for reasons we can get into if you'd like. But a total stock market index fund is essentially the same. Wherever you buy it, they may track a little different index and it might be a little different, but performance wise over time it's essentially the same. So if you're comfortable with Schwab or Fidelity or somewhere else and they have that absolutely no problem, go for it. And let me just take it one step further because this is the other part of that question I get a lot. And typically this would be, well, I'm looking at my 401k and there is no total stock market index fund, but there is this S&P 500.

[Paula Pant]

That's exactly what I was about to ask.

[J.L. Collins]

That's where you were going to go.

[C]

That's literally what I was about to ask.

[J.L. Collins]

We're clairvoyant. You don't have to ask, I don't have to answer. We just couldn't do this. But for the benefit of people listening, yeah, they have this S&P 500 index fund. Would that work? And yeah, absolutely. So what you need to understand is that these funds are cap weighted. And all that means is that the bigger the company, the bigger percentage of the fund it represents. And so the s and P500, as the name suggests, is the 500 largest US based companies. And because these things are cap weighted, that is going to be 80, maybe 85% of VTS X. The rest being made up of mid and small caps. And if you track the performance of those two funds over time, the lines mesh together, essentially they are so close in performance, there are going to be times when large caps outperform for a while and and so The S&P 500 might do better. And there'll be times when small and mid caps are strong and that might boost, but essentially over the periods of time you're going to be holding these things, it's the same thing. And then the final part of the question I get is, well then why are you in VTSAX specifically? And my answer is it's the same reason I put Tabasco on my eggs. It's just a little extra spice as.

[Paula Pant]

Opposed to Cholula or anything else.

[J.L. Collins]

Yeah, well, Cholula is also spice as opposed to just salt and pepper I would suppose. Yeah.

[C]

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[Paula Pant]

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[Paula Pant]

There was an argument we don't hear this quite as much anymore in the post tariffs era, the post Liberation day era, but particularly in early 2025, we would often hear the argument that cap weighted indexes comprised so heavily of the magnificent seven, the Mag seven, that you essentially lost a lot of diversification because so much of your portfolio hinged on just those seven stocks. You know, like Nvidia, Tesla, Apple, Alphabet, Meta, these were the market. Starting from that premise would make a number of arguments. Some people would argue that you therefore needed to counterbalance with more small cap. Some people would argue that you therefore needed to be in something like an equally weighted fund rather than a cap weighted fund. Can you talk about your response to we'll say both of those arguments and other arguments that you heard from from people who criticized the lack of diversity inside of a total stock market index fund?

[J.L. Collins]

Sure, that's a great question and very pertinent. So the criticism is seeing it as a bug. I see it as a feature. So basically people are saying you look at VTSAX or the S&P 500 for that matter, and it's really because of this cap weighting and this dominance of tech companies. It's a tech fund, it's become a sector fund. And that's true to a certain extent. But there's very few things, Paula, very, very few in my experience that are good about getting old, being an old guy. But one of them is that I can remember times when tech didn't dominate, when it was dominated by financials, when it was dominated by energy, when it's dominated by consumer staples. Right. So what's at the top of these funds? What is the top sector in the economy at different points in time is different. And the reason this is a feature in my mind is a process. This is one of the reasons I love broad based low cost index funds is they are are self cleansing. And that's a term I coined to describe actually the way they treat individual stocks. But it applies to sectors. And all that means is that the strongest stocks, and by extension the strongest sectors are like cream. They're going to rise to the top and I'm going to benefit from that and I'm going to own them. But these things are cyclical. Companies and sectors have lifespans. Right. And I don't know when that shift is going to take place. I don't know what's going to replace any given stock that's at the top now or any given sector. And I don't have to know because whatever it is, I will own it by virtue of owning these funds and it'll rotate ahead. So I'm become a little bit notorious, I gather, from my Google talk back in 2018, when one of the questions was, I've got it from the audience and of course they're all Google employees, was I got a lot of Google stock that I've earned here and should I hang on to that? My answer was no, I didn't think anything of at the time, but evidently it was kind of a bold thing to say at Google in front of a bunch of Google employees. But the reason and what I said at the time is Google's a great company and it's probably going to be a great company for a long time, but at some point, some competition is going to come along and eat its lunch. And that's sort of hard to accept, right?

[Paula Pant]

I mean, we're already beginning to see that with AI.

[J.L. Collins]

We're beginning to see it. But back in 2018, there was no glimmer of this. Jeff Bezos, actually, and kudos to him, said a number of years ago that someday that's going to happen to Amazon. And he said, my job is to delay that as long as I possibly can. So for those who think that Amazon's so hugely dominant, Google's so hugely dominant that you're always going to be the top companies, I give you Sears. Now, there may be people listening who don't even know what Sears is. And that's kind of the point. But just a little history lesson, if you'll indulge me. Sears was the Walmart and Amazon of its day combined. So Sears was a retail company that was started in the late 1800s, and it was brick and mortar stores to begin with. And somebody at Sears said back in the day, there are a lot of Americans living out in the countryside, rural America, and they don't have access to stores. But you know what we could do? We could send them a catalog with all of our stuff in it, and then they could order stuff out of that catalog and we could mail it to them. What does that sound like? That's Amazon. And at the same time, we're going to have brick and mortar stores. Sears dominated for 100 years. In 1973, they built the tallest building in the world, the Sears Tower in Chicago. Yeah, tallest building in the world at that Time hugely dominant in that space. Try to find a Sears store open today. If in 1973 I'd been being interviewed and I wasn't, and I'd say, Sears is not going to be here forever. People say, you're crazy. It's been here for 100 years. What are you talking about? But going back to our fund, if I was owning, and of course these index funds didn't exist then, but when Sears was part of it, as Sears began to fade away and Walmart and Amazon began to grow and grow, I didn't have to worry about that happening. I didn't have to predict it either that these was going to happen to these individual companies or in that space, I benefited. So going back to the original question with the tech domination, I'm benefiting from it. All of us who own these funds are. If someday in the future that changes and something else dominates, I don't have to predict that. I don't have to worry about it. Because whatever is coming up behind it, that replaces it alone. That's why I think it's a feature, not a bug.

[Paula Pant]

I'll add to that Blockbuster Video, great example. It used to be synonymous, just the term Blockbuster was synonymous with a company so big that it could not be disrupted.

[J.L. Collins]

Absolutely. And it disappeared almost overnight. That was stunning.

[Paula Pant]

Exactly.

[J.L. Collins]

And to your point, nobody would have predicted that.

[Paula Pant]

My favorite example is the Dutch East India Company, if you want to go way back.

[C]

Right.

[Paula Pant]

Quite literally, we live in geographies today and in nations today that are based on decisions made by the executive team at the Dutch East India Company. And it no longer exists.

[J.L. Collins]

In many ways, that was the beginning of modern capitalism. And modern capitalism has transformed the world into a far better place. I mean, we are living longer, healthier, less poverty, more wealth throughout the world than ever before. And it started with that kind of thinking. But who was it? Was it Galileo or some? One of the most brilliant people of all time in history was alive at that point. And he saw the bubble in that and he owned the stock and he sold. But then it kept going up and he doubted himself and he went back in at the higher price. And then the bubble burst. I wish I could remember who the hell this was. But he has some great quote about how I can predict the movements of the heavens, but nobody can predict what the market is going to do.

[Paula Pant]

Wow. Speaking of the Dutch East India Company. So this is also a listener submitted question.

[J.L. Collins]

Yeah.

[Paula Pant]

This person asks, quote, you've always said you prefer US Stocks. Can you imagine a time when the US is no longer a world power, and it would be wise to have more allocated to international stocks.

[J.L. Collins]

Yeah. So another great question. And the short answer is yes. So when I talk to international audiences, I sing a little bit different tune because the US Is the only country in the world where you can safely have that home country bias that I recommend for those of US in the US and the reason for that is the US accounts for about 60% of all equities in the world. You already own a big slug of the world. The other reason is that those large companies that dominate, because it's cap weighted that we talked about, are international companies. So I expect the world to continue what it's done since World War II, which is to grow and expand and continue to prosper. At the end of World War II, the economy was essentially in the United States because everywhere else was in ashes. At least all the industrialized countries were in ashes. And then through the Marshall Plan and what have you, we began to help rebuild them, which was to our great benefit as well as theirs. Those countries got back on their feet and their economies grew and prospered. Has made for a much wealthier, healthier world. And that's a great thing. I expect that trend to continue. The trend being the pie getting bigger with more prosperity and those other countries doing steadily better. And perhaps the share that the US represents will begin to shrink. So when I'm talking to international audiences, if I were in any other country in the world, I would already be buying a world fund because I wouldn't be entirely comfortable investing in another country that wasn't my own 100%. And also, I think that's where we're ultimately going to. So at some point, my advice will probably change, even for people in the US to go to a world fund. I don't think this is happening anytime soon. I think the US is so dominant that dominance is going to last probably for my lifetime. But again, remembering, I'm an old guy. But when I talk to my daughter, who's in her early 30s, about this, and she's 100% in VTSAX, as per my recommendation, this is something I say, you want to keep an eye on this, because at some point you might want to start to transition. Now, my opinion of not needing international stocks might be the single most controversial opinion I have, the one that is most at odds with the vast majority. In fact, as far as I can tell, everybody else talks about this. And so frequently people will say to me something along the lines of, well, J.L. i understand what you're saying, and I understand why you don't feel the need for international. I hear you, but I kind of still do. I think I do want to add international to my portfolio. You're not going to get a big fight from me. If you feel that way, go for it. I don't have any problem with it at all. I kind of look at you and say you're probably a little bit ahead of the curve. In my opinion, you're probably moving a little sooner than you need to. But by all means, it's not going to be a bad decision. At the end of the day, you're still going to do very, very well. And by the way, rolling back to our early part of a conversation, that's also a point that's worth making. So if you follow, just to take one example, Paul Merriman's approach, the four fund approach, is not like you're going to do badly. And as I've already said, if you actually faithfully follow it, you might even do a little better than what I'm recommending. That's being a challenging thing to do. But the key is to be invested and engaged in staying the course over time. So all of these things will get you there. I think my approach will get you there more reliably and certainly more simply. And it's a little easier to whether the ups and downs that can be so traumatic. But it's not like these things are bad choices. So if you add international and that makes you more comfortable, you're not making a bad choice and you won't get a great argument from me. I just don't see the need.

[Paula Pant]

When you talk about a world fund, do you mean Total International?

[J.L. Collins]

Yeah. So again, I'm a Vanguard fan and I can't think of the ticker either the ETF or the fund offhand. But Vanguard has a world fund. And the distinction is a World fund includes the US So there are a lot of funds out there that are ex us.

[Paula Pant]

Right.

[J.L. Collins]

So if you're in VTS X, for instance, and you want to add the rest of the world with our funds that do exactly that, my recommendation currently today to my international readers is make your life simple. Buy a world Fund, then it's taken care of and then also has, because right now the US is, as I said, about 60% of that fund. If that shifts, the fund will do that for you automatically. If China, which has a surprisingly small stock market, by the way, but if that increases, that'll shift automatically. And so that's where I would go, I don't see the need to complicate your life with two different funds. Now, an exception to that, by the way, is if you were holding BTS X, let's say 10 years from now, you see the trend that I was just talking about evolving, and you say now it's time to go international and you're in a taxable fund. Well, you're probably not going to sell your VTS X and take the big tax hit in order to go into the World Fund. And that would be a case where you could just add the international EX U S Fund and do the balance. But if I'm doing it inside an IRA or a 401k or something, I'd probably just go ahead and make the switch to the World Fund and keep my life simple.

[Paula Pant]

Do you have any recommended allocation when that time comes?

[J.L. Collins]

Well, again, I think the World Fund itself allocates it pretty well because it allocates it based on the size of those individual markets. So if you buy Vanguard's World Fund, and my memory, Paul, isn't good enough to tell you, other than the US you're going to get 60% US, you're going to get, I want to say, 30% EU, probably another 25%, something like that in the Asian markets.

[Paula Pant]

Oh, so you would go entirely. You would make the switch entirely from VTS X to world, including us, barring.

[J.L. Collins]

A tax implication of.

[Paula Pant]

Right, Barring the.

[J.L. Collins]

Right, yeah, absolutely.

[Paula Pant]

Okay.

[J.L. Collins]

Right. So again, if I'm.

[Paula Pant]

So you would still be essentially having one fund. Yeah, one equities fund. You have a one equities fund portfolio.

[J.L. Collins]

Exactly. That's the beauty of a World Fund. It just makes your life so simple. And then as the world evolves, you'll benefit from that.

[Paula Pant]

What would be the indicators that would signal that it's time to make that move? What would be some examples of those indicators?

[J.L. Collins]

So again, if you look at the trend from World War II, right. You start with the U.S. essentially, and I don't know the exact number, but it had to be close to 100% of the world economy at that point. Right. But now we're 60 and just looking at stock markets, by the way, not necessarily economies, because China is a very large economy with a fairly small stock market. Right. And of course, we can only buy publicly traded companies. Right. So that's the way I tend to look at it. And right now the US which might have been close to 100% of the world's stocks available at the time, is now 60%, because the rest of the world has come up. That's the trend that I would follow. Does the US portion get down to 55? 50, 45, maybe. Once it gets down under 50, I begin thinking about making a shift again. I don't see this happening anytime soon. This is not like the daily trading in the stock market, where it fluctuates dramatically. This is going to be a gradual. Barring some sort of unforeseen economic change would be a gradual kind of thing that you can pretty easily keep your eye on if and when you decide to pull the trigger is sort of a personal decision. But that's the kind of thing that I would look at. And so that's why I say maybe it's 60%, which is where we are today. You say, you know what? Yeah, I think I want to pick up that other 40%. So I'm going to do that world fund deal now. And that's why you won't get any pushback from me. But if we were still at 80%, I'd say, yeah, you probably don't want to do that.

[Paula Pant]

Would you add in a world bond allocation as well?

[J.L. Collins]

Bonds are an interesting thing. In my world, you add bonds when you're living on your portfolio. Because when you're growing your wealth, if you're following the simple path, you are shifting part of your earned income, hopefully a significant part, into buying your freedom, which you do by buying assets and in particular a total stock market or an S&P 500 fund. And you're putting money in on a regular basis, depending on how your income flows in. So weekly, monthly, whatever it is, that smooths the volatile ride of the stock market for you, because you're going to keep dropping that same amount of money in every time. As the market plunged back in February, March, whenever it was went down about 20%, well, you would have picked up shares at a bargain price. That's how it smooths the ride for you, right? So if you're doing this, market drops become something that you not only don't have to worry about, but they become your friend. You're buying things on sale, but when you're living on the portfolio and you no longer have that earned income that you're channeling into your investments, most people are probably going to want something else to smooth the ride, and that's the role that bonds play. So circling back now to world bonds, I think I'd be more comfortable just being in U.S. bonds because the world bond market gets a little bit squirrelier, a little bit tougher in regulation. So that would be my preference and probably for an awful long time.

[Paula Pant]

Yeah, many countries have higher default risks, greater risks generally. Although you are seeing now treasury yields spike.

[J.L. Collins]

They are indeed.

[Paula Pant]

So there's quite a bit of risk, even with US Bonds these days.

[J.L. Collins]

Yeah, well, I doubt that there's quite a bit of risk in Treasuries, but it's not moving in a great direction. Was it Moody's that just recently?

[Paula Pant]

Yeah, Moody's downgraded the US and they.

[J.L. Collins]

Were the last of the three big credit raiders to do it.

[Paula Pant]

Exactly.

[J.L. Collins]

So by the way, that indicates that's not a huge change, but it's certainly not something that you want to see happening. But it goes back to the old analogy of what's the cleanest shirt in the dirty hamper? While I wish our credit was a little more pristine than it's become, it's still the most pristine in the world and will probably be that way for the foreseeable future.

[D]

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[Paula Pant]

States.

[C]

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[Paula Pant]

We'Re seeing interesting correlations that have historically existed start to get broken. So we're seeing treasury yields spike at the same time that stock prices drop, which is not something that we typically ever see. I mean we saw it a little bit in 2022, but other than 2022, that's typically just not something that we normally see. And it's the type of behavior that you would more often find in a place like Argentina.

[J.L. Collins]

Yeah, 2022 was remarkable. It was one of the all time and might even be the single you could fact check me on. This might be the single worst year for bonds in history. But if it wasn't the worst, it was right up there at the top. Yeah, it was dramatic.

[Paula Pant]

Certainly the worst in my adult life.

[J.L. Collins]

Well mine too and I'm a little bit older.

[Paula Pant]

How old are you?

[J.L. Collins]

I'm 74.

[Paula Pant]

Happy birthday.

[J.L. Collins]

Well, I'll be 75 the next birthday so November 1st you can wish me a happy birthday. But yeah, so yeah, I haven't seen anything happened to bonds like it did in 2022.

[Paula Pant]

Right.

[J.L. Collins]

But I still think they can play the role that we're describing. And of course when back in 2022 when that was happening, my social media blog were lighting up with our bonds over and I said well let's roll back the clock a little bit. And if you go back to 2000, you had the tech crash and the market dropped about 46%. And then in 0809 you had that debacle and the market I think got the lowest was 56% if I remember correctly. And in that decade, the first decade of this century, the stock market returned a negative 0.63, which doesn't sound terrible but it's not great. It's a negative return and So a lot of people look at that as a lost decade. I look at it as a great opportunity. If you were following the simple path, you would have been accumulating shares of BTS X for an entire 10 years at bargain prices. And if you'd gotten to say 08 or 09 and said this has been a terrible decade in stocks, I'm done. These stocks are over and thrown in the towel, you would have missed one of history's all time great bull markets that we've had ever since. So yeah, you shouldn't panic and sell when something bad happens to an asset class. That's kind of the natural part of the process. So not overly concerned about what's going on with bonds.

[Paula Pant]

We talked a little bit earlier about vti. What do you think about all in one etf? Funds. Funds of funds.

[J.L. Collins]

So Target Date Fund is a fund of funds. And so it has bonds and stocks and it has international stocks and international bonds. And as it gets closer to its target date, it shifts the allocation to be more conservative, which is to say more bonds. And then there's a very similar fund to funds. And I can't think off the top of my head what they're called, but it's the same concept where they'll have international bonds, international stocks, US the same, and typically cash, like a money market fund, but it's not linked to a date. So that portfolio allocation doesn't change. So if you want something that holds a particular allocation, you can buy it that way. I think those are great options. You've got to buy one fund and then maybe when you're living on the portfolio you got a second bond fund and oh, that's so complex. And then you're going to want to rebalance those two funds. If that's too complex for you, if you really don't even want to think about that, then I think a fund of funds, a Target Date Fund or one of these others that the name's alluding me for, that's not the best option, but it's a viable option. And as we talked about a moment ago with some of these other options, it's not like they're going to be a bad choice. It'll serve you well. And the key thing, the most important thing, is that whatever approach you use, whether it's Paul Merriman's or mine or a Target Date Fund, is that you stay the course. You continue to pour money into it and let it do its work for you is time is your friend. And compounding is what you're looking for.

[Paula Pant]

You know, it strikes me that your approach is essentially a one fund portfolio while you're in the accumulation phase.

[J.L. Collins]

Correct.

[Paula Pant]

And then a two fund portfolio while you're in the decumulation phase.

[J.L. Collins]

So you probably won't de cumulate because actually it's probably going to continue to grow. But yes, when you're living on the portfolio.

[Paula Pant]

Exactly. Yeah. And that's actually a one fund fund portfolio, which is what you advocate is not that far off from a four fund portfolio, which is what Paul Merriman acts.

[J.L. Collins]

Exactly. And that's why I don't have any strong argument against what Paul's recommending. If you were interviewing Paul, he would say the same thing. He'd say, hey, I think what I'm doing is optimal and here's why. But if you're not quite comfortable with that and you're looking at J.L. collins, you're going to be fine. So I think it's the same kind of thing. One of the challenges, by the way, that I get with this one fund idea is people say, well, that's not diversified. Isn't diversification important? And my response to that is, well, first of all, you're correct. It's not diversified in that it is strictly equities, which is what we want when we're building our wealth because there is no more powerful growth tool available to us than stocks. But when it comes to equities, it's extraordinarily diversified. I mean, VTSAX holds something like 3,600 different publicly traded companies. You own VTSAX and in every company, 3,600 companies, from the factory floor to the CEO, they're working to make you richer. When I first started investing, when indexing was new and I didn't know about it, but the idea of a diversified portfolio wants something like you want to pick about eight, maybe 10 sectors, and you want to pick one or two companies in each of those sectors because nobody can really follow effectively more than 15 or 20 companies. And you'll be plenty diversified. So when I can, with one fund, own 3,600 companies, I feel I'm pretty well diversified.

[Paula Pant]

Yeah, 15 to 20 companies is not diversification at all. I mean, it's actually a very, very small basket.

[J.L. Collins]

But it was back in the day, that was the very definition of it.

[Paula Pant]

Wow.

[J.L. Collins]

It was realistic. Because if you're owning individual companies, the problem with owning individual companies is now you really have to pay attention.

[Paula Pant]

Right.

[J.L. Collins]

With vtsax, my holding period is forever, and then my heirs, the holding period will be forever because it's self cleansing. So back in the late 60s, early 70s, you know, when I was riding dinosaurs around and what have you, there was a concept called the Nifty 50. And the Nifty 50 were simply the 50 largest, most successful US companies. And the concept was all you had to do was buy these 50 companies, put your stock certificates, by the way, that was actual paper certificates that they would mail to you showing that you own these things, put them in your bank and you're done. You never have to make another decision. The problem is, as we talked about earlier with Sears as an example, Sears was in the Nifty 50. Polaroid, probably nobody listening to us knows who Polaroid was. Xerox, you know, all these companies, Kmart. Yeah. That were hugely dominant at the time have come and gone to be replaced. So if you own the Nifty50, there'd be probably a few companies that were still around, but it would not have served you well over decades. I used to say, if you look at the dow industrial index, 30 stocks, right? Everybody knows the Dow. I think it was originated sometime in the late 1800s. I used to love to ask the question, so how many of those original companies do you still think are on the Dow today? And the answer, when I first started asking, that was one, and it was GE. And this is back in 2011. Well, GE has since fallen off. So there's not a single company in the Dow that was there originally. And that goes back to what we were talking about earlier. Companies come and go, sectors rise and fall, and the index fund takes care of that for you.

[C]

What a great conversation that we just had with J.L. collins. We covered a ton of ground today. We talked about why he believes that simple beats mathematically optimal because of the realities of human behavior. We talked about his take on how index funds are self cleansing and automatically adapt as the economy changes. And we defined a total stock market fund, something that gives you ownership in 3,600 companies. Here's what we didn't do. So we've only gotten through about half of the questions that my most engaged newsletter subscribers sent in. We've got a lot of amazing questions that are still to come. So in part two of this interview, which is going to drop next week, we're going to tackle the really meaty questions about retirement withdrawal strategies, about how J.L. collins thinks about spending after you've quote unquote, won the game. We're going to talk about his very controversial take on international diversification. We're going to discuss what happens after you actually become financially independent. We'll deep dive into questions about business ownership versus investing in the public markets, and he's going to share personal stories from his own journey in transitioning from corporate life into fi financially independent life. All of that is coming up in Part two, which we're going to air next week. So make sure you're following this podcast in your favorite podcast playing Apple Spotify, Apple Podcasts, Pandora, whatever it is you use to listen to this show. Make sure you're following us in your favorite podcast playing app and tune into our Part two episode, which we are going to air next week. Now, with that said, let's get to three key takeaways that came out of today's conversation. Key Takeaway Number one Simple Beats Optimal when it comes to human behavior, there's a debate in the personal finance world as to whether you should pursue a path that is simple versus a path that is mathematically optimal. And J.L. collins argues that the mathematically quote unquote best investment strategy is not the one that will necessarily make you the most money in real life. More complex approaches like Paul Merriman's four fund portfolio or the efficient Frontier these, when followed, could theoretically outperform. But J.L. collins believes that most people won't stick with the discipline that is required to execute these strategies properly over the span of the next several decades.

[J.L. Collins]

The challenge is I have enough trouble getting people to stay the course with just vtsax, right? The idea that somebody is actually going to take those four funds faithfully rebalance them over the course of, say 20 years, which is going to require them, by the way, to be selling the ones that are performing best to buy in the ones that are lagging. That just goes so much against human nature from my experience that I don't think anybody is ever going to execute that.

[C]

So in the argument between the simple path versus the optimal path, JL's position.

[Paula Pant]

Is to follow the path of simplicity.

[C]

And that is key takeaway number one. Key takeaway number two Index funds are self cleansing. They automatically adapt to economic changes. I asked JL if he was worried about the fact that index funds are pretty tech dominant right now. He used historical examples to explain why he's not he says that throughout history there has been an automatic rotation of companies and sectors that have at times dominated various indices and then receded. And that is a feature, not a bug. So he talked about big dominant companies like Sears, right? Sears used to be the Amazon of its day or the Walmart of its day, and eventually that fades away and new leaders emerge.

[J.L. Collins]

Sears was the Walmart and Amazon of its day combined. So Sears was a retail company that was started in the late 1800s and it was brick and mortar stores to begin with. And somebody at Sears said back in the day there are a lot of Americans living out in the countryside, rural America, and they don't have access to stores. But you know what we could do? We could send them a catalog with all of our stuff in it, and then they could order stuff out of that catalog and we could mail it to them. What does that sound like?

[C]

That's Amazon Index funds are self cleansing. That's the second key takeaway. Finally, key takeaway number three. JL argues that you don't need perfect diversification because by buying one total stock market fund you get 3,600 companies. He pushes back against the common criticism that a single index fund isn't diversified enough. And he points out that when he started investing, people would own 15 or 20 individual companies and they would do that in order to be quote, unquote diversified. But but today getting a total stock market index fund gives you ownership in 3,600 companies across every sector.

[J.L. Collins]

I mean, VTSax holds something like 3,600 different publicly traded companies. You own VTSax and in every company, 3,600 companies from the factory floor to the CEO, they're working to make you richer. The idea of a diversified portfolio, you want to pick about eight, maybe 10 sectors and you want to pick one or two companies in each of those sectors because nobody can really follow effectively more than 15 or 20 companies. And you'll be plenty diversified.

[C]

Those are three key takeaways from part one of this two part episode series of our interview with J.L. collins. Thank you so much for tuning in. If you enjoyed today's episode, make sure you're following us us in your favorite podcast playing app so that you can catch part 2. Also, share us with your friends, your family, your neighbors, your co workers, your dog walker, your babysitter, your swim coach, your soccer coach, your microwave repair guy, the person who mows your lawn. Share this with your accountant, your bookkeeper, your kids, elementary school librarian.

[Paula Pant]

Share this with all of the people.

[C]

In your life because that is the most important way that you spread the message of of F I R E. Also, please open up that favorite podcast playing app of yours and leave us up to a five star review. And don't forget to subscribe to the newsletter affordanything.com Newsletter thank you again for being part of this community. I'm Paula Pant. This is the Afford Anything podcast. And I'll meet you in part two of today's interview coming up in just a few days.

[Paula Pant]

See you there.