034.The Stock Series Part 2

034 | The Stock Series Part 2 | JL Collins

This podcast is Part 2 of the Stock Series discussion with JL Collins, author of The Simple Path to Wealth and the website JLCollinsNH; we discuss the Great Depression and the mindset you need to be a successful long-term investor, plus how to allocate between equities and bonds.

In Today’s Podcast we cover:

  • Part 2 of the Stock Series conversation with Jim Collins
    • If you have not yet listened to Part 1 you can listen to it here
    • Be sure to check out the associated Friday Roundup here for Brad and Jonathan's take-aways
  • A discussion of what happened during the Great Depression and the Crash of 1929
  • A large portion of the crash was due to many people buying stock on margin
  • Jim’s explanation of leverage and buying stocks on margin
  • Jim’s Four Lessons to watch out for
  • Making peace in your mind when a crash/correction happens. What caused it?  Psychology or something legitimate?
  • Unless you believe the US economy has permanently collapsed, then “the market always goes up” over time according to Jim
  • Jim says the best thing that can happen to a young investor is a market crash as you get to purchase stocks “on sale” for potentially years
  • Savings rate is the most crucial aspect for the FI community since it allows you to continually invest in good markets and bad
  • Bull markets and bear markets are a part of life. We need to toughen up mentally to prepare for both
  • Jim’s explanation of the 40 year period starting in 1975 showing the calamities that happened and yet how far the market increased
  • Nobody knows what the next 40 years will hold, but we have a dynamic economy
  • What stage of investment life are you in? It varies depending on your age
  • Wealth building and wealth preservation stages and the discussion surrounding both
  • When you’re in the wealth building stage you need to have your psychology correct: Keep pumping money into the market and take advantage of sales when the market goes down
  • 100% equities in the wealth building stage per Jim
  • When you stop working for money you are in the wealth preservation stage
  • What percentage should you have in stocks and bonds in the wealth preservation stage
  • The more you have in bonds the smoother your ride will be, but the lower your return will be
  • Your tolerance for volatility will determine your percentage in equities and bonds
  • Would Jim ever consider going back to 100% equities?
  • Mathematically you are always better off in stocks than bonds over the long-term
  • Even Jim contemplated selling during recent market plunges, so everyone is susceptible to this

Listen to Brad and Jonathan's thoughts about this episode here.

Links from the show:

Books Mentioned in the Show:

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7 thoughts on “034 | The Stock Series Part 2 | JL Collins”

  1. I think this is a great investment strategy from a psychological perspective since it is so simple. But from a financial perspective I would think it isn’t that great since from a numbers perspective it is actually safer and you earn more when you diversify your money in different asset allocations. You can look on portfolio charts websites to see how this works out (he would probably be a great person to interview also). But when you are saving over 50% of your income you are probably only looking at a few years or even months difference of when you hit FI.

    This first came to light for me when I was reading a book on Probability & Stochastic Processes for my masters program. I can’t say that I’m smart enough to really understand all that though :-).

  2. OK, last comment on this. If you look at his Golden Butterfly portfolio, I believe that did better than the stock market. Of course, past returns doesn’t guarantee future performance :-). Just food for thought.

    Here’s the website. https://portfoliocharts.com

  3. So I am one of those people that has always found investing scary/overwhelming and am pretty new to this FI path, but as I have been listening to these podcasts (especially the J.L. Collins ones), I have kind of formed a new perspective on how I look at that scary and probable 50% crash that helps me sleep at night. I haven’t really heard the way I’ve framed it in my mind spelled out yet, so I wanted to float my perspective out there and would appreciate any feedback on if this logic is sound or if anyone else thinks this way too.

    J.L. has made me feel better about the scenario of the market crashing when you first start out, but the advice of just sitting tight when you’ve been investing for years and the tens to hundreds of thousands of dollars in your portfolio drops by 50% because the market will return still didn’t make me feel any more comfortable. After mulling it over and playing with some numbers however, I essentially came to the realization that if you have been investing for a while (which I am assuming that if you have tens to hundreds of thousands of dollars you have been doing it for at least several years) and the market crashes by 50%, a good portion of that loss, if not all of it, was interest you compounded over the years. Some of your principle might be gone too, but most of it is still there. I know this varies based on rate of return, how much you invested each year, how many years you’ve been doing it, etc, and there is always that chance that you just have bad luck with the timing, but this seems to hold true for most cases even when these factors are all varied. (This is true for most cases, right?) Really the person who loses the most principle would be a FIRE person at the end of their building phase/beginning of FI that put a lot of money in the market in a few years and hasn’t had time on their side for compounding, but even then, a good chunk lost for them was interest. Anyway, with the loss being mostly interest, you would essentially be in the same spot had you just been putting it in a bank for all those years because you were too scared to lose money (in which case you would have had no chance at keeping up with inflation nevermind making any money). So, yes seeing $500,000 go down to $250,000 would be hard, but if you have been steadily investing over the years, a good portion if not all of that $250,000 was interest. This is just how I have been framing it to help prepare myself for if/when I face that situation. I would be only slightly worse off, but most likely still better off than if I had not invested at all.

    I also understand that even with this logic and knowing it was mostly interest lost, seeing $500,000 go to $250,000 will probably be emotionally stressing and I will be tempted to sell. My back up for this is to remind myself that if I had played it safe over the years and had no money in the stock market and had been saving the $250,000 (since that $250,000 is the principle anyway) in the bank and the market was down, I would be jumping at the chance to put it in the market, not pull it out of the market.

    Hopefully that all makes sense! Sorry this is a long post, but I would appreciate feedback from someone who understands the market and investing calculations way better than I do. Thanks!

    • I think that is an excellent way to think about it. Especially if you keep track of your contributions so that you know how much of a potential loss is ‘your’ money and how much is actually just loss of gains (or ‘interest ‘ as you call it).

  4. I just wanted to touch base with guys real quick and let you know how much I’m enjoying your shows (this one is fantastic!).

    I had recently written a post on my top PF podcasts (https://www.routetoretire.com/10-best-financial-podcasts/) and asked for some other podcasts that my readers enjoyed. I heard from a number of readers and some of them had mentioned this show. I hadn’t heard of it before, but I downloaded a handful of episodes… blown away!

    You guys are educated, the shows are entertaining to listen to, and you’ve brought on some great guests as well (like Jim Collins, of course!). This is now my favorite podcast to listen to. Keep up the great work!!

    — Jim

  5. This is exactly my problem the example about the parents investing on stock market.
    I know myself and I know I’ll panic and sell if it plunges 50% so I only put 10% of my money in VTI. How to build confidence to go more in ? I’d love to listen Collins opinion and tips on that.

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