The Simple Path To Wealth by JL Collins: book review and summary.
Shortly after my husband and I switched to diehard frugal mode and started accumulating savings to buy our first motorhome, I went down a rabbit hole of personal finance content. Every day on my way to and back from work I was either reading a blog post, or watiching a youtube video, or devouring a book to learn more about how to optimise my income, my time, and my savings.
It’s not that I want to be rich, I really don’t. And what I mean by that is: I don’t want to compromise what’s important to me (time, fun, mental health) for the sake of having a massive bank account. In fact, my plan isn’t to earn a lot of money to spend it on luxurious fripperies and a lavish lifestyle. But rather, I want to create a life where I don’t need to buy fripperies to feel like I’m enjoying myself, and where earning an income doesn’t compromise the time that I have to live a life I enjoy.
The question that has presented itself to me is: how can I work less than 40 hours per week, possibly for less than the next 30 years (I’m in my mid thirties), while doing something that brings me freedom and fulfillment? And while pursuing an answer, I have encountered a deluge of highly valuable content that has served as an inspiration to me to make financially sound decisions for my household.
One of these resources is a quite well-known book called The Simple Path To Wealth, by JC Collins. This book was originally born from a series of letters that Collins wrote to his young daughter in an attempt to help her understand investing. That’s why it’s such a pleasurable read: the information is broken down into digestible nuggets, and it does a truly great job of debunking the myth that investing is highly complicated and just for experts and trained brokers. Turns out, you can invest from as little as £1 and you don’t need to know much about stocks and trading at all to generate stock interest.
THE THREE MAIN TAKEAWAYS OF ‘THE SIMPLE PATH TO WEALTH’
From my read of the book, Collins offers three learnings he wants us to stick to.
Avoid debt at all costs.
Collins shares a very American approach to debt, which is that being in debt is completely normalised, if not encouraged by society. The amout of debt held by Americans is staggering, and has them tied forever to monthly minimum payments, and interest-accruing loans that never seem to end. And it seems like whenever someone does manage to dig themselves out of a massive credit card debt, the next thing that they do is dive straight into a new car loan, or holiday money loan, or another credit card debt.
What Collins says is:
- There are plenty of options to avoid debt. for example: you don’t need a brand new car. Cars are notoriously a bad investment: the moment you drive your new car out of the dealer, it has already shaved half of its value. Instead, you can save up to have enough money for a used old car that will do the job, especially if its job is just carrying your butt to work for a few miles per day.
- He also reflects that not only avoiding debt makes you a saving, it can also make you money. For example, say that instead of signing up for a new £20k car loan, you bought a used old car for £5k, and invested the difference: the compound interest gains you would have in 10 years out of those saved £15k would be immense. The cost of that new car isn’t £20k, it’s actually £20k + loan interest rate + thousands of pounds of compound interest you could be earning in your sleep for the next 10-20 years.
- He also argues that if you really wanted to, you wouldn’t even need to have a massive mortgage for a house. He says that if you are careful about choosing where you want to live, and what house you need to live in, you might even get away with a much shorter loan, or even a cash payment. Personally, I don’t know about this. As a millennial, I am painfully aware of how bad the housing market is, especially in the US and the UK… I think it’s almost impossible to live in a city AND buy a house outright nowadays. However, I get his point: if you really wanted to avoid being tied to a mortgage and are lucky enough to have a certain geographic freedom, you may consider choosing a more affordable house and location before signing up for decades of monthly payments.
My personal reflection is that yes, getting yourself into debt for the sake of buying stuff you don’t really need is an unnecessary waste of money. However, I don’t think that debt is always bad. If one day you’ll need to get a mortgage, you will need a good credit score, and in order to have a good credit score, you need to demonstrate your ability to repay debt. A good way to do this is to use credit cards and paying for them in full every month, and/or use Loqbox.
2. Spend less than what your earn.
This is straightforward, and I 100% agree: you should always live within your means, which incidentally helps with staying out of debt. You can read my previous articles on how I track my expenditure and how I increased my savings rate from 5% to 30-50% overnight.
The book has tonnes of helpful reflections on how to live a frugal lifestyle without compromising on the quality of your day-to-day life.
3. Invest in index funds.
Now, this is the juicy part, and by the time I finished reading it my mind was imploding. The chapters dedicated to how investing can be incredibly simple demolished my pre-concieved notions that it is was only accessible for brokers, and that you have to have an in-depth knowledge of the stock market to be successful at that sort of game.
People like you and me understand investing as being like the scenes from The Wolf of Wall Street, where a bunch of money-hungry coyotes in suits and ties shout down their phones and convince gullible millionaires to give them mountains of cash. Or, do you guys remember that scene from Trading Places, where Eddie Murphy is able to predict people’s behaviour and earn the company a lot of money from investing in orange juice, or something? That’s what I thought investing was. And it can be, but Collins guides us to another path.
According to the book, what we normal people need to do is to disengage with the idea that we can buy single stocks from a company for a lower price, and time the market in a way that allows us to sell those stocks for a higher price. Turns out, it is almost impossible to do, and even those who we think are great at it are not actually as good in the long run.
The healthier, steadier, long-term rewarding alternative is to rely on index funds. In a nutshell, index funds are pots of money you can invest in, made up of a multitude of shares from many different companies selected and managed by a fund manager, who gets a very small managing fee in return for their services.
Collins says that this is the simplest and most reliable way to get money out of your money for the following reasons:
- You are not investing in a single company, but in hundreds of them at the same time. This means that even if one company is not doing well at a certain point, that risk is mitigated by other companies whose value is increasing.
- Index funds are self-cleansing: if a company runs to the ground, it is eliminated from that fund and replaced by a better and more successful company selected by the fund manager, without you having to move a finger.
- The management costs are very, very low, compared to having a finance guy advising you on which stocks to buy at a certain time.
And please make note of this last point,
- Over time, the stock market has only ever gone up.
Let me explain. Let’s look at the index fund that I am currently investing in, which is the S&P500, aka the top 500 companies in the US. Let’s search for its performance in the last year:
Not great, right? BUT WAIT. Let’s see what happened in the last 5 years:
Well, that paints a totally different picture, doesn’t it? Had I invested in it in my late 20s, or the day after we all went into lockdown, I would have had a pile of cash sitting there that I would not have had to work for at all.
If you want to understand investing, this is what you need to take away from this book:
It is not about timing the market, it is about time in the market.
So, whenever you are plopping your savings in an index fund, you should do it thinking about the long run: at least 5 if not 10 or 20 years. Collins advises to not even check your investments if not once or twice per year: you should let them sit there and do their thing. Eventually, the day-to-day, month-to-month and year-to-year fluctuations will show an ever growing trend upwards.
THE BIG UGLY EVENT
I should also mention that Collins is very careful to remind us that past performance is not necessarily an indication of future performance, and that depending on your age and priorities, you should create an investment portfolio that matches what you have panned out for the future, and your attitude towards risk. For example, if you are close to retirement age, you might want to mitigate some of the risk associated to stocks by moving to a portfolio with more bonds (which is when you lend money to a company and earn interest out of that loan).
Collins reminds us of the Big Ugly Event that happened in 1929, see this graph of the Vanguard’s Total Stock Market Index Fund (basically, the totality of America’s stock market):
Fortunes were lost during the Great Depression, and it took quite a few years for the stock market to climb back to where it was before. I can summarise Collins’ thoughts on this here:
- If you see an aggressively rising market, a disaster is round the corner. No matter how tempting it is, lay low and keep your chips (or sell them if you don’t have a long investment life span).
- Once the market crashes, it’s too late to do anything about what you’ve lost… except, you can wait it out. If you have time, you can ride the storm and wait for the market to rise up again. It would have taken a lot of bad luck for someone to invest a lot of money at the peak, right before it crashed, but even so, 10 years later if they held tight, they would have been where they were at the start.
- That depression was deflationary, which means that the cost of living also decreased drastically. Therefore, if your investments decreased by 90% and you were left with, say, £10,000 instead of £100,000, those 10k would have had far more buying power than 10k did pre-crash.
- The Big Ugly Event has happened only once in the last 112 years, and we haven’t had another in 83 years. Does this mean it will never happen again? No. Does it mean it is an extremely rare, actually unique event? Yep. The changes in the economic policy made since then have mitigated the risk of it ever happening again. In fact, we have had a few recessions/market crashes in the last 30 years, however, none of them were nearly as devastating as what happened in 1929.
I hope this summary of The Simple Path To Wealth was helpful to you.
If this article tickled your interest and you want to learn more about long-term investing, I really advise getting the book. It is such a pleasurable read, and truly life-changing in the way that it breaks down such an overwhelming concept, and offers an accessible solution to optimise your savings.
Greetings! Very useful advice within this article! It is the little changes that will make the greatest changes. Many thanks for sharing!