JL Collins, author of the iconic book on personal finance, discusses the simple path to wealth and achieving financial independence. They cover topics such as stock picking, career choices, the psychological impact of luxury car brands, the benefits of index investing, and navigating market downturns.
Index investing offers advantages over active investing with lower expenses and market returns.
Staying the course during market downturns leads to better long-term investment results.
Index investing is still a small portion of the market and has not significantly impacted price discovery.
Deep dives
The Power of Index Investing
Index investing offers a number of advantages over active investing. With index funds, you can get the return of the overall market while enjoying lower expenses compared to actively managed funds. Research has consistently shown that it is difficult for investors to consistently outperform the market over the long term. While some critics claim that passive investing is creating a bubble or distorting price discovery, the reality is that the amount of active investing still far outweighs index investing. Additionally, concerns about the long-term future of the US and potential market crashes should not deter investors. History has shown that market downturns are a normal part of investing, and staying the course has ultimately led to long-term success.
The Importance of Staying the Course
One of the key lessons from investing is the importance of staying the course and resisting the urge to panic during market downturns. Market crashes, such as the one in 1987, can be frightening and filled with media panic, which often leads to knee-jerk reactions. However, trying to time the market is extremely challenging and can lead to missed opportunities. Studies have consistently shown that investors who stay invested and avoid panic selling tend to achieve better long-term results. While market downturns can be unsettling, it's important to remember that they are a normal part of the investment journey and should not deter investors from maintaining a long-term perspective.
Critics of Index Investing
Critics of index investing often bring up concerns such as a passive bubble or the risk of market distortions. However, it's important to note that index investing is still a relatively small portion of the overall market, and it has not reached a point where it significantly impacts price discovery. Furthermore, arguments about index investing potentially harming price discovery overlook the fact that active investing still dominates the market. While outliers like Japan's market collapse in the past have led some to question index investing, the US market is fundamentally different and continues to offer opportunities for long-term growth. It's important to stay informed, assess risks, and make investment decisions based on individual goals and circumstances.
Lessons from Past Market Crashes
Examining past market crashes, such as the one in 1987, can provide valuable insights for investors. During times of market panic, it's common for investors to fear that the current crisis is the beginning of something worse, leading to widespread selling and further market declines. However, history has shown that markets have consistently recovered and gone on to new highs over time. For example, the 1987 crash was followed by a gradual market recovery and subsequent record gains. It's important to remember that markets climb a wall of worry, and short-term volatility should not shake long-term investment strategies. When it comes to investing, staying the course and remaining focused on long-term goals is key.
The Power of Simple Path Investing
The Simple Path to Wealth, as advocated by index investing pioneer Jack Bogle, offers a powerful strategy for long-term financial success. By investing in low-cost index funds, investors can enjoy market returns while minimizing expenses. The key to success lies in staying invested through market downturns and resisting the temptation to panic sell. While concerns about the future and geopolitical risks may arise, it's essential to remember that downturns are common and temporary. By staying the course and adhering to a simple and disciplined investment approach, investors can build long-term wealth and achieve financial independence.
JL Collins is the author of the most iconic book about personal finance and financial independence - The Simple Path to Wealth.
He is an advocate of index investing and pursuing financial independence.
His new book - Pathfinders - contains accounts from people from all walks of life who have pursued financial independence and the impact it has had on their lives.
Nothing on this podcast is investment advice.The information in this podcast is for information and discussion purposes only. It does not constitute a recommendation to purchase or sell any financial instruments or other products. Investment decisions should not be made with this podcast and one should take into account the investment objectives or financial situation of any particular person or institution.
Investors should obtain advice based on their own individual circumstances from their own tax, financial, legal, and other advisers about the risks and merits of any transaction before making an investment decision, and only make such decisions on the basis of the investor’s own objectives, experience, and resources.
The information contained in this podcast & show notes is based on generally-available information and, although obtained from sources believed to be reliable, its accuracy and completeness cannot be assured, and such information may be incomplete or condensed.
Investments in financial instruments or other products carry significant risk, including the possible total loss of the principal amount invested. This podcast, the host, and the guest do not purport to identify all the risks or material considerations that may be associated with entering into any transaction. This host & guest accepts no liability for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this content.
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