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Demystifying Index Fund Investing with JL Collins

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JL Collins, author of A Simple Path to Wealth, joins Jillian to help you start Index fund investing.

More About JL Collins:

JL Collins has an extensive amount of experience and knowledge around investing.  He is the author of A Simple Path to Wealth and Collins has been a speaker for Google Talks and the Master Your Money Summit. He is also the founder of the annual event Chautauqua which creates a space for conversations about Financial Independence, early retirement, and happiness. His work offers a wealth of information so you can get on a path towards smart investment decisions.

Topics Covered:

  • Why investing is so scary for so many
  • How to keep investing simple
  • The basics of Index funds
  • What you should do when the stock market crashes
  • The two simple steps you need to follow to master investing

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Why Investing Is So Scary To So Many

Figuring out how to invest is a challenge for many, including Jillian. By the time she and her husband started investing, they had paid off all their debt and saved up a lot of cash. Like many people, Jillian waited far too long to start investing. She was scared, intimidated and didn’t really understand it. This combined with the fear of the market, it’s volatility, kept her from investing sooner.

JL Collins says she is not alone. A lot of people get themselves out of debt and then start to put that money in savings. This is a great discipline, but investing needs to happen to secure your financial future. The sooner the better since your money will have more time to grow.

It’s scary, quite honestly, because the investment world makes it scary. They make it sound complex because the scarier and more complex they can make it, the better to drive you into their arms.

If the investment world can make the subject hard to approach, you might be tempted to run to them for help. JL says they are often selling overpriced or unnecessary kinds of products. Here is a visual example JL uses:

I liken it to a banquet table, that had every kind of imaginable complex delicacy and food that you could think of. Then in one tiny corner of that table are the simple healthy foods that are best for your body. You can put your arm down on that table and sweep all that other stuff onto the floor because you don’t need it. All you need is this tiny little corner of that healthy stuff of what’s good for you.

In the investment world, that tiny corner of health food is low-cost index investing. JL covers this in detail in his book, which Jillian recommends often to anyone new to investing.

Keep Investing Simple

You don’t need to spend your life thinking about how to invest your money. You just need to get a couple of things right.

Index funds

An index fund is a basket of stocks. The stocks reflect everything in a particular index. JL recommends the VTSAX index fund. It’s a Total Stock Market Index fund offered by Vanguard. This Total Stock Market index fund buys from every publicly traded company in the United States. It’s like diversifying your portfolio without the hassle of comparing individual stocks.

The idea is you’re not trying to guess which company is going to outperform and which company isn’t going to perform well because the research is very clear you can’t reliably do that. So you buy the entire basket. That means you enjoy the retruns of stocks overall.

The return on stocks overall in the United States is powerful and performs well over time. JL doesn’t believe you should hire an expensive manager for your portfolio. An index fund does this for you at a low cost. JL doesn’t want you to forget about the costs. Pay attention to things like management fees and expense ratios because they pull off your returns and compound over time. Keep these low like the VTSAX fund, and keep the money in your pocket.

What About Bonds?

JLs’ second recommendation is a Total Bond Market Index fund. Stocks and bonds play different roles. While you’re young and can weather the up and down of the market you can take more risk and buy into only a Total Stock Market Index Fund like VTSAX. As you get older, your investments will adjust to incorporate more bonds which are a more stable (less volatile) investment.

For someone young like my daughter, who’s 27, I tell her all she needs to do is buy VTSAX, the Total Stock Market Index fund, buy as much as she can whenever she can and otherwise forget about it. Don’t worry about when the market goes up and down. None of that matters. You’re investing for the long term.

What About A Stock Market Crash?

Jillian described the stock market crash of 2008 as ‘excruciatingly painful’ to watch. The impulse to pull out of the market can be strong when something like a crash occurs. JL says that not moving your money and leaving it alone will allow it to perform.

The market is a volatile beast. It does go up and down. The thing your listeners need to understand is that the overall trend is relentlessly up.

Obsessing over the markets’ ups and downs can lead to rash decisions that will hurt your long term investment strategy. Don’t be tempted into tinkering or selling at the wrong time. If this kind of thing still makes you nervous, JL recently created a guided meditation for when the stock market plunges.  You could also check out his Stock Series to look into this further.

Get These Two Things Right And You’ll Be On The Simple Path To Wealth

JL sums it up in two simple steps which are reiterated here:

  1. Buy into a Total Stock Market Index fund. When you’re older you can buy into a Total Bond Market Index Fund.
  2. Don’t mess with it. No tinkering allowed.

If you can get this right, you’ve figured out investing.

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Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Disclosures.
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