The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life By J. L. Collins

1. Avoid debt at all costs. If you already have it, it is worth considering if paying it off ahead of schedule is the best use of your capital. The only time a debt can be classified as good, when opportunity cost would be better than one-time payment from your savings.

“Debt should be recognized as the vicious, pernicious destroyer of wealth-building potential it truly is. It has no place in your financial life.” 

2. The most fundamental truth of the universe: You have savings, you got risk. Earlier you come to realize, the better. Let’s look at the so-called safe harbor generally get a mention: 

Buying a house, maybe the property price goes down or value appreciation can’t beat inflation and not to mention the yearly maintenance cost. 

Bank saving account, you may say its safe bet, nothing will happen to your money. There are many instances, where governments have to save their sorry assets ($16.8 trillion dollars bailout of Big Bank, US government Failed Bank Bailout Investments) 

“There is no risk-free investment. Once you begin to accumulate wealth, risk is a fact of life. You can’t avoid it; you only get to choose what kind. Don’t let anyone tell you differently.” 

3. You have savings, you got to deal with risk. Nobody likes to see their hard-earned money get depreciate. The safest way is to invest in index funds. Not only it’s safest but simple and non-time consuming for people busy with bridges to build, nations to run, humanity to advance. 

“In my view, for most people, the best thing is to do is owning the index fund. There are huge amounts of money people pay for advice they really don’t need.” 

Warren Buffett in his 2020 Berkshire Hathaway annual shareholder meeting. 

4. Index funds may sound intimidating, but they’re just a basket of stocks that represent a broad market. In the case of an S&P 500 index fund, you’re buying a small piece of the 500 largest publicly traded US companies. This results in: 

1. Automatic diversification, which minimizes your overall risk. 

2. They are self-cleansing. Some company fades, new companies launch, grow, prosper, go public, and replacing the dead and dying. 

3. Most Index Fund always goes up. Rational being 

What is the worst possible performance a bad stock can deliver? It can lose 100% of its value and have its stock price drop to zero. Then, of course, it disappears never to be heard from again. 

Now let’s consider what is the best performance a stock can deliver? 100% return? Certainly, that’s possible. But so is 200%, 300%, 1,000%, 10,000% or more. There is no upside limit. The net result is a powerful upward bias. 

5. Now we have seen they are safest but how about being simple.

Here the 2-line plan: 

1. If you’re in the wealth accumulation phase (earning regular money and. ~15 years away from retirement): Buy Total stock index fund (some of the top global and national stock market indexes) on monthly basis. 

2. If you’re in the wealth preservation phase (less than 15 years from retirement): Distribute annual investment between Total stock index fund and Total bond index fund on a monthly basis with more weightage to bond. And that’s it. 

6. Can everyone really retire a millionaire following this plan?

The short answer is a qualified “Yes!” 

Over the 40 years from January 1975 — January 2015 S&P 500 index fund has averaged an annual return of ~11.9%.

If you started in January 1975 and invested $150 per month ($1,800 a year) by January 2015 you would have had $1,136,656. 

7. Sure this path seems safest and simple, are there any gotchas?

You have to keep in check of the one major emotion that drive

investors: Fear. 

The curse of fear is that it will drive you to panic and sell when you should be holding. The market is volatile. Crashes, pullbacks and corrections are all absolutely normal. None of them are the end of the world, and none are even the end of the market’s relentless rise. They are all, each and every one, expected parts of the process. 

8. Index fund investing is better than mutual-funds. 

1. Cost: Mutual funds will tend to cost you with fees ranging from around 1% to upward of 3%. On the other hand, index funds are generally lower cost, with annual fees ranging as low as 0.05% to 0.07%. 

2. Return on investment: The fact is, few fund managers will beat the index over time. 

In 2013, Vanguard posted the results of their research on this. Starting in 1998 they looked at all of the 1,540 actively managed equity funds that existed at the time in US market. Over the next 15 years only 55% of these funds survived and only 18% managed to both survive and outperform the index. 82% failed to outperform the index fund. 

9. A side benefit of following this plan: Having F-You Money.

Here’s the author himself explaining its benefit 

“If you decide to pursue financial freedom you are going to have to choose to spend your money on investments. Somehow in our culture this has come to be seen by most people as deprivation. That has never made much sense to me. Personally, there is nothing I’d rather buy or own than F-You money. With it, the world’s possibilities are endless and you are faced with the delicious decision as to what to do with your freedom. The only limits are your imagination and your fears.” 

— JL Collins

“You should buy rental property” 

“Buy shares in company XYZ” 

“Don’t trust the share market” 

“Trust the share market” 

“Start flipping credit cards” 

“Life is short, just go shopping” 

Avoid Debt > Spend less than I earn > Invest the surplus

AUTHOR

ANKIT VERMA

ASSISTANT PROFESSOR