The Simple path to wealth. How to become a successful investor, gain financial well-being and freedom

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Author: James Collins 

Eight main words(An easy path to wealth)

The Simple path to wealth:An easy path to wealth The secret to financial success can be summed up in just eight words(An easy path to wealth)

  • avoid debt;
  • spend less than you earn;
  • invest the surplus.

These eight words can be expanded into a few key rules that will help you achieve financial success as soon as possible.

Principle 1: Avoid debt

The main thing that money gives is freedom: the freedom to do what you like, to communicate with those with whom you want, the freedom to go where you want. No wonder the concept of fuck-you-money has been established in English-speaking countries. This expression implies that you have savings that allow you to leave your job at any time, shave off your boss and live to your heart’s content.

Any debt is a fetter. It limits your decisions. He makes you nervous. He makes it dependent on the unloved, but more or less monetary work. There are no good debts. The relief that loans bring, whether it’s a mortgage or a student loan, is false. Avoid debt at all costs. If you already have debts, then your most important thing is to pay them off.

What to do first:

1) Make a list of all non-essential but regular expenses that you can easily do without. The amounts saved are usually significant – they will be used to pay off the debt as soon as possible;

2) make a list of all your debts and rank them by interest rate. Those where the rate is above 5%, extinguish as quickly as possible. Gradually move from paying off the largest debts to paying off smaller ones.

What not to do:

1) pay financial advisers who promise to solve your credit problems – let this money go to pay off debt;

2) spend time pooling all the loans in one bank with a lower interest rate. Reducing the rate from 18% to 15% is not an option. Your target is 0%.

Principle 2: Spend less than you earn

Wealth is largely a matter of needs. If your lifestyle requires you to spend more than you earn, then you will have to say goodbye to financial independence, no matter how big your salary is.

The problem is that most of us think about money the wrong way. We consider them only in terms of how much they can buy at the moment. And you need to think about how much this money can earn.

You have $   20,000 and use it to buy a car, thinking it’s a good investment. In fact, at the time of purchase, the car turns into an expense item. Plus, it actually costs a lot more. With a market return of 8% a year, $20,000 will bring you $1,600 a year, which means your car actually cost you $21,600. And that’s just the first year! These are your opportunity costs. Always keep this concept in mind when preparing to spend a tidy sum.

The Simple path to wealth

The more percentage of your income you save and invest, the sooner you will have money. Think about how to reduce your fixed expenses, expenses, expenses. Try to save and invest 50% of your income. Without debt, this is quite doable. Is the bar too high? But, by learning to live on less money, we determine what is truly important and desirable for us, and we discipline ourselves.

Principle 3: Invest the Surplus

How to think about investments

Cars, houses, and gold are bad ways to invest. Your money must grow. The best way to multiply funds is stocks: you invest in a life, constantly growing business. The best way to invest in an index fund. A few words about how it works. The world of securities can be compared to a horse race. If you want to get rich, you certainly want to bet on a prize-winning stallion. But the outcome of the races is often unpredictable, even the outsider can win, and the prize-winner can be late. Likewise, even the most successful company can go bankrupt. But if you bet on all the horses in a race at the same time, you will always win. This is how an index fund works: it covers the securities of many companies, making the choice for you.

Collins prefers one of the most famous index funds in the world – Vanguard. Readers can also look to other low-fee index funds. It is important that the chosen fund includes US stocks, because this country is a key player in the global economy.

How to think about the market An easy path to wealth

The main advantage of index funds is the maximum simplicity of the strategy: you simply follow the market. This, however, according to many, is the main drawback of index funds, because the market is in a fever every now and then. How can you stay calm while watching stocks rise and fall in price? There is a constant temptation to intervene in the process, to rush to sell or buy.

How to be? Accept that the market will always shake. It is patience that is critical to successful long-term investing. Successful investing is, by definition, long-term. Any short-term investment is speculation.

If you bought General Motors bonds for $10,000 and intend to hold them to maturity, this is an investment. If you buy shares of General Motors for $10,000 only to sell them tomorrow for $11,000, that’s speculation.

The Simple path to wealth

In the long term, the market is only growing, which means that your money will also grow. Of course, there will be ups and downs. Of course, numerous experts, and financial analysts will tempt you with various forecasts. Don’t believe them: no one knows the future. Otherwise, everyone would be Warren Buffett’s.

Beware of consultants who offer to dispose of your investments as profitably as possible. Your interests diverge dramatically. They are interested in complex, fee-laden investments through active management funds. The fees associated with active management are usually much higher, and there is no guarantee that managers have chosen the best stocks. They claim to control our money – in fact, they control our anxiety, impatience, and fear. And they charge dearly for it. Buying all the stocks in a market index (i.e., betting on an index fund) is much safer and cheaper than “manual” professional management.

Benjamin Graham, in his classic book The Intelligent Investor, back in 1949, portrayed the stock exchange as an unbalanced Mr. Market. Every day he tries with all his might to attract your attention, reporting on price fluctuations: either he tears his hair out and orders to sell shares, or he laughs with joy and persuades you to buy in every possible way. His mood jumps ten times a day. How to deal with his tantrums? With calm irony, waiting until Mr. Market makes a really good offer – say, quality securities at a very low price against the backdrop of stock market panic. But 99% of his screams are air shaking. Alas, most investors see the ultimate truth in Mr. Market. But not you.

The Simple path to wealth

Where to keep money

Stock. When you buy shares, you are buying a stake in a business. They will provide the best profitability in the long run and save you from inflation (after all, at such moments, stocks also rise in price). Collins prefers Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX).

Bonds. They are less volatile than stocks, which promises some stability. Not only do they earn interest, but they are sometimes tax-free (say, US Treasuries are exempt from state taxes). They save you from deflation (it happens when commodity prices fall, which means that the money received from bonds will have more purchasing power – this will compensate for the losses that deflation will bring to your other assets). If you’re going to be holding bonds, it’s best to keep them in an index fund. Collins prefers Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX).

The two key elements of bonds are the interest rate and the term. When interest rates rise, bond prices fall, and vice versa. It’s safer to hold bonds to maturity and not sell early so you don’t lose value (with the exception of a sudden default). Long-term bonds are considered more risky, but also more profitable.

The Simple path to wealth

Cash – to cover everyday expenses and emergencies. Don’t hold too much cash – it’s constantly being eaten away by inflation.

What should be the percentage of funds? A 100% equity portfolio provides the greatest return over time. However, the ratio of 10-25% in bonds / 75-90% of shares is no less profitable (above 25% of bonds is already too much). All you need to do is balance funds periodically – not too often (once a year or whenever the market jumps 20%+ up or down). Collins’ budget at the time the book was written, in 2015, looked like this:

  • ~75% shares (VTSAX);
  • ~20% bonds (VBTLX);
  • ~5% in cash.

VTSAX and VBTLX – is it enough to accumulate a fortune? After the 2008 crisis, people are ready to invest in everything – especially in foreign stocks. But this is both a risk of losing money on currency differences and a higher expense ratio (VTSAX has 0.05% for minimal costs – even inexpensive international funds are twice as expensive). In addition, the 500 largest shares in the US, which make up 80% of VTSAX, are already owned by international companies – Apple, GE, Microsoft, and Coca-Cola.

Either way, always keep in mind the cost of fees and additional risks.

For American investors, a variety of pension plans are also of great importance, according to which the employee, employer, or both of them regularly contribute a certain amount to the employee’s individual retirement account (401K, Individual Retirement Account, Health Spending Account). In Russia, along with the Pension Fund, there are dozens of non-state pension funds. The latter are involved in both the formation of pension savings (this type of pension is strictly regulated by the state, savings are invested only in reliable assets, which limits their profitability), and non-state pension agreements (these are their own NPF programs and riskier assets that allow you to earn more). NPF programs, as a rule, provide for the opportunity to withdraw the money accumulated in the account before retirement.

The Simple path to wealth

What stage of wealth are you in?

The investor journey is divided into two stages:

1) the stage of wealth accumulation;
2) the stage of wealth preservation.

These stages are not related to the actual age of the investor. When you work, save, and invest what you save, you are in the stage of wealth accumulation. Here the main bet is placed on shares – it is worth bringing them up to 100%. When your income declines or dries up (say, you lost your job), the stage of wealth preservation begins – here investments should bring income. At this stage, bonds can be added. You can bet on them 5-20 years before retirement. If this date is not clearly defined, or if you are risk-tolerant, bet on stocks, in good years they will provide a high return.

The stage of accumulating wealth suggests decisiveness. Any investor knows about dollar-cost averaging. The bottom line is that you spend the same amount on the same stocks over a period of time. In fact, this is what index funds are built on. But there are caveats. Let’s say you suddenly have a tidy sum (an inheritance or money from the sale of another asset) and you want to buy very attractive shares of company N. But you do not risk investing the whole amount at once. Wouldn’t it be better to regularly spend only a fraction of that money on these stocks, say $300 each month? If a stock is trading at $10 per month, you will buy 30 shares. If it rises to $12, you will buy less. 

Plus strategy: you are careful and do not puzzle over whether now is the right time to invest a large amount. Cons of the strategy: you are missing out on a profitable investment that Mr. Market gives you with your extra money. How to be?

  • If you are in the wealth accumulation stage, risk this lump sum. As Warren Buffett says, when it rains golden rain, you need to substitute a bucket, not a thimble. After all, you regularly invest up to 50% of your income anyway. And you remember that in the long run, the market will still rise. In a word, at this stage, decisiveness is more likely to be beneficial.
  • If you’re in the wealth preservation stage, stick to an established asset allocation strategy (if the market drops and it’s not profitable to buy, less volatile bonds will offset the losses).

Each investor must, from the very beginning of the journey, determine for himself the measure of risk: how much he is ready to sacrifice in such cases.

You are rich. What’s next?

So you avoid debt, spend less than you earn, and invest your excess well. How to understand that the financial balance has been achieved? As soon as 4% of your assets can cover your annual expenses, consider yourself financially independent. Of course, this figure is not a constant. If a financial crisis hits and your stock portfolio is cut in half, or if you lose your job, spending will have to be adjusted. If the year is good and the market is growing, you can spend a little more.

Once you achieve financial independence, you can:

  • make a pleasant variety in your life: travel, hobbies, etc. (However, the principle “live within your means” does not lose its strength!);
  • have children and devote enough time to them; get married/get married (be careful here: do not mess with financially irresponsible people);
  • buy a house (houses are not investments, but expensive pleasures; decide on this only if you are sure that you are firmly on your feet);
  • do charity work (you don’t have to be Bill Gates for this – you can open a fund for $25,000).

If you decide to do charity work, focus your efforts on a couple of organizations, don’t spread out. Carefully check through whose hands your money passes and whether these hands are clean. Finally, remember that you don’t have to start a charitable organization to really help people. Direct assistance to a neighbor in distress does not promise tax benefits, but it brings immediate benefits.

The Simple path to wealth

Each of us has only one obligation to society: to ensure that we and our children are not a burden to others. Remember about social guarantees of the state like a pension, but don’t count on them too much. No one will give you financial freedom but yourself.

Top 10 Thoughts

1. We look at money only in terms of how much it can buy. And it is worth thinking about how much this money can earn. 

2. Avoid debt, and if you have any, pay them off as soon as possible.

3. Spend less than you earn: Wealth is not only a matter of income but also a matter of needs.

4. Try to save and invest 50% of your income. Without debt, this is quite doable.

5. Do not contact financial advisers.

6. Do not believe the tantrums in the market. The main virtue of an investor is patience.

7. The best way to increase funds is stocks because you are investing in a living, growing business.

8. Invest in an index fund: Bet on all the horses in the race at the same time.

9. A 100% equity portfolio provides the greatest return over time. The ratio of 10-25% in bonds / 75-90% of shares is no less profitable. Above 25% of bonds is already too much.

10. As soon as 4% of your assets can cover your expenses, consider yourself financially independent.

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