This article is an excerpt from the Shortform book guide to "The Simple Path to Wealth" by JL Collins. Shortform has the world's best summaries and analyses of books you should be reading.
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Do you want to get into investing but aren’t sure where to start? Do you need professional financial help to get started?
Investing doesn’t have to be complex. People selling investments profit by making them complicated—they convince you that you need professional help to get started with investing. Yet the actively managed funds they sell are costly and underperform index funds. According to financial blogger J.L. Collins, getting started with investing only requires answering three questions and applying three wealth-building tools (stocks, bonds, and cash).
We’ll consider Collins’s three questions for beginner investors and the wealth-building tools below.
Three Questions for Beginner Investors
Getting started with investing requires that you answer these three closely related questions:
1) What investment stage are you in? Are you in the wealth accumulation (income-producing) stage, the wealth preservation (post-working) stage, or a combination of the two (for instance, you’re between jobs)?
2) What level of risk are you comfortable with?
3) What’s your investment horizon? In other words, for how many years do you plan to accumulate wealth? If you’re just starting your working life, your investment timeframe will be much longer than if you’re close to retirement.
These questions are interrelated in that your risk tolerance will correspond with your investment horizon—you’ll take more risk early and less later as you near retirement. Also, your level of risk and investment horizon will drive your investment strategy. Your job and future plans factor into all three questions. For example, if you’re planning to retire early, you’ll have a shorter investment timeframe, and you’ll want to reduce your risk and preserve your wealth.
When answering these questions, keep the following in mind:
- All investing carries at least some risk. You can’t eliminate risk but you can choose the type of risk—for example, choosing less-volatile bonds if you’re uncomfortable with risk as you near retirement.
- Your investment stage isn’t necessarily tied to your age. It can shift back and forth during your life, impacting your earnings: Sabbaticals, early retirement, taking a lower-paid position to follow a dream, or re-entering the workforce after retirement all affect whether you’re in the wealth accumulation or preservation stage.
- Having F-You Money is essential. Life and jobs are uncertain, but you’ll have more room to make choices if you have F-You Money. If you don’t have this financial cushion now, start building it—it’s never too late.
- You should be a long-term investor, even if you’re older. Don’t follow the typical investment advice and shift too great a percentage of your money from stocks to bonds (often considered to be a safer investment) to protect your nest egg as you near retirement. At age 60, if you’re in good health, you might have another 30 years to build wealth, which is a long-term horizon. Maybe you’ll want to keep building wealth in retirement to leave money for a younger spouse, grandchildren, or a charity.
Three Wealth-Building Tools
The next step after answering the three questions is building your investment portfolio. To do it, you need only three simple tools: a stocks index fund, a bonds index fund, and a money market or bank account.
1) Stocks: Collins’s preferred option is investing in VTSAX, Vanguard’s Total Stock Market Index Fund. (He writes that he’s not being paid to promote Vanguard.) Stocks give you the best returns over a long timeframe and because they grow in value, they serve as a hedge against inflation. VTSAX is your wealth-building tool.
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Like what you just read? Read the rest of the world's best book summary and analysis of JL Collins's "The Simple Path to Wealth" at Shortform .
Here's what you'll find in our full The Simple Path to Wealth summary :
- A simple road map to achieving financial independence and a secure retirement
- How to put your money to work for you as your “servant”
- Why you don't need a financial advisor to help you invest
