Afford Anything - JL Collins Part 1: The Simple Path vs. The "Optimal" Path

Episode Date: July 11, 2025

#624: JL Collins, author of "The Simple Path to Wealth" — the guy synonymous with VTSAX and chill — joins us for Part 1 of a two-part series where we skip the basics and dive straight into the complex stuff. We ask him whether his simple approach actually beats more sophisticated strategies, and his answer might surprise you. He says that Paul Merriman's four-fund portfolio probably outperforms his one-fund approach mathematically. But Collins argues that execution trumps optimization every time. Most people can't stick with complex strategies for 20 years, he says, especially when those strategies require selling winners to buy losers – something that goes against human nature. Collins prioritizes what works in real life over what looks good on paper. He calls index funds "self-cleansing" because they automatically rotate out failing companies and sectors while rotating in the new winners. You don't need to predict which companies will dominate next – you'll own whatever rises to the top. The episode covers his thoughts on VTSAX versus VTI, international diversification, and why he'd rather put Tabasco than Cholula on his eggs — his quirky way of explaining personal preferences in nearly identical investment options. Resources Mentioned: Episode 31, Interview in 2016 with JL Collins Timestamps: Note: Timestamps will vary on individual listening devices based on dynamic advertising run times. The provided timestamps are approximate and may be several minutes off due to changing ad lengths. (0:00) Intro (1:00) The efficient frontier (2:00) Simple vs optimal but complex paths (4:30) Paul Merriman's four-fund portfolio vs VTSAX (6:00) JL says Merriman's approach is mathematically superior but not behaviorally (7:30) Risk parity investing discussion (8:30) Sequence of returns risk and retirement bonds (12:30) JL's birthday email from Jack Bogle (15:00) VTSAX vs VTI  (17:00) Total stock market funds across brokerages (23:30) Mag 7 concentration risk (27:00) Sears story and self-cleansing index funds (30:30) International diversification and US dominance (39:00) World funds versus separate international (45:00) When to shift to world fund (47:30) Bond allocation timing strategies (48:30) Target date funds  (50:30) One-fund vs two-fund approach (52:00) Historical diversification and Nifty 50 For more information, visit the show notes at https://affordanything.com/episode624 Learn more about your ad choices. Visit podcastchoices.com/adchoices

If you're a long time listener of this podcast, you already know J.L. Collins, the author of A Simple Path to We're going to interrogate him today. Welcome to the Afford Anything Podcast, the show that understands you can afford anything but not everything. This show covers five pillars. Financial psychology, increasing your income, investing, real estate and entrepreneurship. It's double-eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Welcome, J.L. Thank you. Thanks for having me. It's a pleasure to be here with you, Paula. It's great to be here with you. This is your second time on the show. I know.

And since this audience already knows you, we're going to skip over the basics because we talked about that in your first appearance. Yeah, that works. We'll put a link in the show notes for anybody who doesn't yet know you or your material. We'll put a link in the show notes to the first interview that we did so that people who are newer to this community or who are unfamiliar with your work can get briefed on the basics there. But we're going to dive right in. And start grueling me from the get.

go. Exactly. Yeah. And we're going to go at advanced level right from the start. You're Mr. VTSAX and Chill is how a lot of people regard you. Are you familiar with the efficient frontier? No. You're not? No. Okay. Really, you've never heard the phrase? I think I've heard the phrase, but I can't tell you what it is, so I can speak to it. Oh, interesting. But if you can brief me quickly, we can delve into it. Essentially, the concept is that what you teach is the simple path, which is different from the most optimal path. That there is a distinction between what is simple and what is optimal. And so if a person is a beginner or if they're intimidated by the market or if they have

assets of less than $100,000, sure, it makes sense to begin with a simple approach because it gets you in the game. But once you are an enthusiast, you're excited about this stuff, you're ready for complexity or you have a larger portfolio, let's say over 100,000, maybe you have 500,000, maybe of a million. It makes sense to take the time to do something that is a bit more optimal. And so the efficient frontier is a curve, basically, that was designed by Harry Markowitz to plot the asset allocation that would be used for determining the mix of various types of asset classes that should be in a person's portfolio.

Got it. So that makes sense, and I would argue that the most optimal is the simplest. So I would disagree with the idea that if you make it more complex just because you have more money, that you're improving your performance. So when I wrote the simple path to wealth, I wrote it basically for my daughter. I wrote it for people like her who are very smart, but they have better things to do with their life than obsess about their investments. And the beauty of the simple path and the fact that it's so effective is that you just have to

understand a couple of simple things and implement a couple of simple moves and then sit back and forget it. Now, as I've written the book and I've written the blog, I've discovered I have two audiences, right? I have people like her who respond to it at that level and figure it out and engage it and step away. And then I have people like you're describing who, who love to tinker.

And I've learned I'm never going to dissuade people who want to do that from doing it. But I would be willing to bet that if you got 20 years and you look at my daughter who's not tinkering and you look at those who are, the performance will fall on her side of the ledger. Because the more you tinker, and this, by the way, not just me saying this, these people like Jack Bogle saying it, the more you tinker, the worse your results are going to be. Based on the way you described it, I'm not a fan of the efficient frontier. There are those who would argue it doesn't take a whole lot of additional time, and it doesn't require tinkering, as you describe it. It simply requires an extra 15 minutes and a commitment to adding one or two additional asset classes to the portfolio, maybe some small cap value, a little bit international. But a couple of asset classes, 15 minutes, can make a big difference over the long term.

What you just described there is what Paul Merriman talks about. Paul is a friend of mine. Paul and I have debated this actually on a podcast. I think Paul's an extremely smart guy, and he's done the research, and he has, as I recall, a four-fund portfolio, and it includes international small-cap. He tells me that it outperforms my simple path of just doing BTSAX and maybe a little bit of bonds. And I take Paul at his word. I believe that is probably true. the challenge is I have enough trouble getting people to stay the course with just VTSAX, right? The idea that somebody is actually going to take those four funds, faithfully rebalance them over the course of, say, 20 years, which is going to require them, by the way, to be selling the ones that are performing best to buy and the ones that are lagging. that just goes so much against human nature from my experience that I don't think anybody is ever going to execute that.

So that's another reason that I'm not particularly in favor of it. So again, 20 years out, there will be tinkering that happens with that. Unfortunately, there's people who tinker even with the simple path just holding that one fund. Every time the market drops 5%, my social media and my social media, my personal media, fog, light up with people who are in a panic, and should I sell now, should I step to the sidelines? I just don't see people executing what theoretically might be a better approach. Would you agree with the statement that an approach like Paul Merriman's is mathematically better? Yes. And I conceded that just now, and I conceded it in my conversation with Paul.

And I am trusting his numbers on that. Paul's a very trustworthy guy. When he says, I've run the numbers, And this is what they show mathematically. Yeah, I accept that. I believe that's accurate stuff. But again, it's a matter of execution. All right. I usually don't do this, but because you are so well known in this community, I emailed some of my newsletter subscribers.

Not all of them, but I emailed the 2000 most engaged newsletter subscribers, the ones who have opened the greatest volume of... Heavy hitters. Yeah, exactly. The ones who have opened the greatest volume of emails that I've sent. The software has like an engagement score. So the ones with the highest engagement are the ones that I emailed. I'm in trouble now. And I said, hey, I am going to be speaking with J.L. Collins. What would you like me to ask him? So here we go. Actually, that first question, I want to give a shout out to Ricky because Ricky said, ask him what the efficient frontier is. So thank you, Ricky for that question. And Ricky for showing me up that I didn't know. But the next one comes from Patrice, and Patrice says, I think it might be neat to ask him what he thinks of the risk parity approach to investing. Is that something that you're familiar with as well? Frank Vasquez, do you? I confess I'm unfamiliar, but educate me.

Risk parity is Frank Vasquez's approach to portfolio decumulation. Okay. So it is. So I think I know what this is, but please go ahead. Yeah, it is different from the efficient frontier. It is more complicated than the efficient frontier. I myself really struggle to understand what risk parity is in its fullness. But it is a complicated approach to portfolio decumulation.

Okay. That is championed by Frank Vasquez. So it's hard to speak to it because I'm not entirely sure I'm understanding what it is. Yeah, frankly, I'm not entirely sure I'm understanding what it is either. But I will say to Patrice that just the fact that it is that complicated that we're having this part of the conversation, the more complicated things get, the more expensive they tend to get. And in my world, way of thinking, the less effective they become. What I thought you were talking about, this idea that when you enter into retirement, you load up on more bonds that you might ordinarily do with the idea that you're trying to mitigate the idea of a sequence of returns risk. which simply means that the stock market goes against you in the early years of your retirement

when you're living on the portfolio, and that would be a bad thing. And by loading up on bonds, you smooth that right a little bit. And then as you get past that out five, ten years, you begin to shift more and more into stocks because you're in a little safer ground and you could afford to be a little more aggressive. That is an interesting concept to me, and that is something that I think has merit. If that's what we're talking about, then yeah, I think that's worth consideration. But it sounds like it might not be. There's an approach to sequence of returns risk that is championed by Dr. Wade Fow.

Dr. Wade Fow is a professor of retirement planning. He talks about an approach to sequence of returns risk in which at the very beginning of retirement, you significantly decrease your risk exposure. You load up on a lot of cash equivalents and a lot of bonds. But then after you get into the first four or five, years of retirement, you actually increase your equities exposure. Yeah, just what I was talking about. And again, I think there's merit there. Yeah, exactly. So yeah, that's the Dr. Wade Fow approach. And actually, I advise my parents to do that. So I'm a big believer in that as well. Well, and he's very astute guy. I'm a fan. Yeah. It's funny how we're in this conversation associating all of these approaches with specific people, you know, where J.L. Collins is the VTSAX and chill guy. That's a reputation that you heard. We've got Paul Merriman as the four fund approach. We've got Frank Vasquez for Risk Parity. We've got Dr. Wade Fow for the Sequence Returns Glide Path.

I guess because these are such heady concepts, it's attractive and tempting to associate each philosophy with a particular person to kind of humanize the idea. It's interesting to me because, of course, I'm a proponent of what Jack Bogle created, right? And I started investing in 1975, which coincidentally was a year that Bogle created Vanguard and the first index fund that retail investors, normal people like the two of us and our listeners, could invest it. And I didn't know that at the time. It took me another 10 years to learn about it.

And then I was slow to pick up on it and accept it. Sometimes people put my name in the same sentence with Boguls. And that's a high compliment for me. But I always say if I've lit a candle in the darkness, Jack Bogle is a white hot sun, right? I talk about the things that he pioneered that he created. So I'm flattered to be associated with VTSAX, but I'm not the guy who created the fund or the concept. Right. Yeah.

Did you meet Jack Bogle before he passed? I didn't meet him personally. I kind of an interesting story. I was in Ecuador back of the days when I was doing Chautauqua. Yeah, you and I were in Ecuador together. We were. You were a speaker. I forget what year you were there, of course.

I was there for three years. Yeah, okay. And so, or the early years. The early years. Three of the years. Like 14, 15, 16, something like that. Somewhere in that neighborhood, ballpark. But anyway, one of those years, Jane and I were, I can never remember the name of this little town, which is a shame because I loved it.

There's a little coastal village in Ecuador that I particularly like. I haven't been there in a number of years, but I used to spend quite a bit of time. And she and I were there before Chautauqua. And we were checking out of the hotel, getting ready to travel into the mountains where we had Chautauqua. And I thought, well, you know, before I leave the hotel and lose my Wi-Fi, I'm just going to check my email one last time. It happened, by the way, to be my birthday, November 1st. And so I'm open up my email, and I have one email. And it's from Jack Bogle.

I actually have a blog post about this. I don't reproduce the email he sent me, but I do reproduce my response. And he's telling me that he's read the simple path to wealth. Wow. And very generous in his comments about it. I'm not a person prone to having heroes. Wow. But Jack Bogle is a hero.

Jack Bogle's a fiscal saint. My wife teases me to this day. She said, you knew you were like a five-year-old at Christmas. Wow. You were so excited. How that came about, incidentally, is Taylor Laramore, who I believe is the guy who found at Bogelheads. Early on, send me an email, and he had done a review of the Simple Path to Wealth on

Bogelheads. Again, extraordinarily generous review. He sent me an email to share it. And, of course, I responded and thanked him, and that began a correspondence. And he, his personal friends where it was when Jack was still alive, in the course of chatting back and forth with Taylor, I've always been curious. I said, does Bogel have any concept that the book is out there? And Taylor said, you know, I don't know, but next time I talk to him, I'll ask. Reading between the lines, I think he took the time to look at the book, and that

generated the email that made my birthday. Wow. Yeah, probably the best birthday present I've ever had. Wow, that's incredible. Yeah. Wow. Pleased to be associated as Mr. VTSAX, but even more so to be a messenger for what Bogle is created. Wow. Yeah. I want to go back to some of the listener submitted questions. And the next one actually happens to be right about VTSAX as well as Vanguard's comparable ETF, VTI.

I've never heard of that. Can you explain those to me? VTI is just the, wow. Finally one that you don't have to explain. And so this question which is submitted from the listener says, in the grand scheme of things, does it really matter if you invest in VTI over VTSAX? I understand one is a mutual fund with one daily price and one is an index ETF with a fluctuating price. but I don't really understand why VTSAX would be the preferred choice. So a great question, and it's one I get a lot, and I'm actually going to expand that question a little bit in my answer.

Okay. To answer his question specifically, no. It's the same. It's the same portfolio. I am associated with VTSAX because I'm an old guy, and it came before ETFs were out there, so I'm in VTSAX. there's absolutely nothing wrong with being in VTI. And candidly, if I were starting now, I would probably buy VTI simply because it's a little simpler to buy and sell. But from a portfolio point of view, and if you're following the simple path to wealth, you are going to hold either of these things forever.

So I don't care that when you buy or sell VTI, you get the price at that moment, like when you're buying or selling a stock. Whereas with the mutual fund, you get the price at the end of the day, it doesn't matter to me because I'm holding this thing forever. But it's the same portfolio. Now, the way I'm going to expand that is the other part of that question I get is I'm with fidelity, and I like fidelity. Or I'm with Schwab, and I like Schwab. And they have a total stock market index fund, which is what VTSAX is. Is that okay? And the answer is, yeah, absolutely.

I have a preference for Vanguard for reasons we can get into if you like. but a total stagmark index fund is essentially the same wherever you buy it. They might track a little different index and it might be a little different, but performance-wise over time, it's essentially the same. So if you're comfortable at Schwab or Fidelity or somewhere else and they have that, absolutely no problem. Go for it. And let me just take it one step further because this is the other part of that question I get a lot.

And typically this would be, well, I'm looking at my 401k, and there is no total stock market index fund, but there is this S&P 500 fund. That's exactly what I was about to ask. That's where you were going to go. That's literally what I was about to ask. We're clear boy, and you don't have to ask or I don't have to answer. We just couldn't do this. But for the benefit of people listening.

Yeah, they have this S&P 500 index fund with that work. And yeah, absolutely. So what you need to understand is that these funds are cap-weighted. And all that means is that the bigger the company, the bigger percentage of the fund it represents. And so the S&P 500, as the name suggests, is the 500 largest U.S.-based companies. And because these things are cap-weighted, that is going to be 80, maybe 85% of VTSAX, the rest being made up of mid and small caps. And if you track the performance of those two funds over time, the lines mesh together, essentially.

They are so close in performance. There are going to be times when large caps outperform for a while, and so the S&P 500 might do better, and there'll be times when small and midcaps are strong, and that might boost. But essentially, over the periods of time you're going to be holding these things, it's the same thing. And then the final part of the question I get is, well, then why are you in VTSAX specifically? And my answer is it's the same reason I put Tabasco on my eggs. It's just a little extra spice. As opposed to Chalula or anything else.

Yeah. Well, Chulula is also spice as opposed to just salt and pepper, I would suppose. Mm. Yeah. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology. built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size.

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That's W-A-Y-F-A-I-R.com. Sale ends December 7th. There was an argument. We don't hear this quite as much anymore in the post-tariff era, the post-Liberation Day era. But particularly in early 2025, we would often hear the argument that cap-weighted indexes comprised so heavily of the Magnificent Seven, and the Mag 7, that you essentially lost a lot of diversification because so much of your portfolio hinged on just those seven stocks, you know, like Nvidia, Tesla, Apple, Alphabet, meta, these were the market.

Starting from that premise would make a number of arguments. Some people would argue that you therefore needed to counterbalance with more small cap. Some people would argue that you therefore needed to be in. something like an equally weighted fund rather than a cap weighted fund. Can you talk about your response to, we'll say both of those arguments and other arguments that you heard from people who criticized the lack of diversity inside of a total stock market index fund? Sure. That's a great question and very pertinent. So the criticism is seeing it as a bug. I see it as a feature. So basically people are saying you look at VTSAX or the S&P 500 for that matter.

And it's really because of this cap weighting and this dominance of tech companies, it's a tech fund. It's become a sector fund. And that's true to a certain extent. But there's very few things, Paula, very, very few things in my experience that are good about getting old, being an old guy. But one of them is that I can remember times when tech didn't dominate, when it was dominated by financials, when it was dominated by energy, when it's dominated by consumer staples, right? So what's at the top of these funds, what is the top sector in the economy at different points in time, is different. And the reason this is a feature in my mind is a process. This is one of the reasons I love broad-based, low-cost index funds, is they are self-cleansing.

And that's a term I coined to describe actually the way they treat individual stocks, but it applies to sectors. And all that means is that the strongest stocks, and by extension the strongest sectors are, like cream, they're going to rise to the top. And I'm going to benefit from that and I'm going to own them. But these things are cyclical. Companies and sectors have lifespans, right? And I don't know when that shift is going to take place. I don't know what's going to replace any given stock that's at the top now or any given sector. And I don't have to know because whatever it is, I will own it by virtue of owning these funds, and it'll rotate ahead. So I'm become a little bit notorious, I gather, from my Google talk back in 2018,

when one of the questions was, I've got it from the audience, and of course, they're all Google employees, was I got a lot of Google stock that I've earned here, and could I hang on to that? My answer was no. I didn't think anything of at the time, but evidently, it was kind of a bold thing to say at Google in front of a bunch of Google employees. But the reason, and what I said at the time is Google is a great company. And it's probably going to be a great company for a long time.

But at some point, some competition is going to come along and eat its lunch. And that's sort of hard to accept, right? I mean, we're already beginning to see that with AI. We're beginning to see it. But back in 2018, there was no glimmer of this. Jeff Bezos, actually, and kudos to him, said a number of years ago that someday that's going to happen to Amazon. And he said, my job is to delay that as long as I possibly can.

So for those who think that Amazon's so hugely dominant, Google's so hugely dominant, that you're always going to be the top companies, I give you Sears. Now, there may be people listening who don't even know what Sears is, and that's kind of the point, but just a little history lesson, if you'll indulge me, Sears was the Walmart and Amazon of its day combined. So Sears was a retail company that was started in the late 1800s, and it was brick and mortar stores to begin with. And somebody at Sears said back in the day, there were a lot of merit. Americans living out in the countryside, rural America, and they don't have access to stores. But you know what we could do? We could send them a catalog with all of our stuff in it, and then they could order stuff out of that catalog, and we could mail it to them.

What does that sound like? That's Amazon. And at the same time, we're going to have brick-and-water stores. Sears dominated for 100 years. In 1973, they built the tallest building in the world. The Sears Tower in Chicago, yeah. Tallest Building in the World at that time, hugely dominant in that space. Try to find a Sears store open today.

If in 1973 I'd been being interviewed and I wasn't, and I'd said Sears is not going to be here forever, people say, you're crazy. It's been here for 100 years. What are you talking about? But going back to our fund, if I was owning, and of course these index funds didn't exist then, but when Sears was part of it, as Sears began to fade away, and Walmart and Amazon began to grow and grow, I didn't have to worry about that happening. I didn't have to predict it.

Either that what's going to happen to these individual companies or in that space, I've benefited. So going back to the original question with the tech domination, I'm benefiting from it. All of us who own these funds are. If someday in the future that changes and something else dominates, I don't have to predict that. I don't have to worry about it because whatever is coming up behind it that replaces it alone. That's why I think it's a feature, not a bug. I'll add to that Blockbuster video. Great example.

It used to be synonymous. Just the term Blockbuster was synonymous. anonymous with a company so big that it could not be disrupted. Absolutely. And it disappeared almost over night. That was stunning. Exactly. And to your point, nobody would have predicted that.

My favorite example is the Dutch East India Company. Right? If you want to go way back in history, right? Quite literally, we live in geographies today. Yeah. And in nations today that are based on decisions made by the executive team at the Dutch East India Company. Yeah. And it no longer exists.

In many ways, that was the beginning of modern capitalism. And modern capitalism has transformed the world into a far better place. I mean, we are living longer, healthier, less poverty, more wealth throughout the world than ever before. And it started with that kind of thinking. But who was it? Was it Galileo or some one of those brilliant people of all time in history was a lot of alive at that point, and he saw the bubble in that, and he owned the style, and he sold. But then it kept going up. And he doubted himself, and he went back in at the higher price, and then the bubble

burst. I wish I could remember who the hell this was, but he has some great quote about how I can predict the movements of the heavens, but nobody can predict what the market is going to do. Wow. Speaking of the Dutch East India Company. So this is also a listener submitted question. Yeah. This person asks, quote, you've always said you prefer U.S. stocks. Can you imagine a time when the U.S. is no longer a world power, and it would be wise to have more allocated to international stocks? Yeah, so another great question.

And the short answer is yes. So when I talk to international audiences, I sing a little bit different tune because the U.S. is the only country in the world where you can safely have that home country bias that I recommend for those of us in the U.S. And the reason for that is the U.S. accounts for about 60% of all equities in the world. So you already own a big slug of the world. The other reason is that those large companies that dominate because it's cap weighted that we talked about, are international companies. So I expect the world to continue what has done since World War II, which is to grow and expand and continue to prosper.

At the end of World War II, the economy was essentially in the United States because everywhere else was in ashes. At least all the industrialized countries were in ashes. And then through the Marshall Plan and what have you, we began to help rebuild them, which was to our great benefit as well as theirs. those countries got back on their feet, and their economies grew and prospered, is made for a much wealthier, healthier world, and that's a great thing. I expect that trend to continue. The trend being the pie getting bigger with more prosperity, and those other countries doing steadily better,

and perhaps the share that the U.S. represents will begin to shrink. So when I'm talking to international audiences, if I were in any other country in the world, I would already be buying a world fund because I wouldn't be entirely comfortable investing in another country that wasn't my own 100%. And also, I think that's where we're ultimately going. So at some point, my advice will probably change even for people in the U.S. to go to a world fund. I don't think this is happening anytime soon. I think the U.S. is so dominant, that dominance is going to last probably for my lifetime, but again, remembering when I'm an old guy, but when I talk to my daughter, who's in her early 30s about this, and she's 100% in VTSAX as per my recommendation, this is something I say,

you want to keep an eye on this, because at some point you might want to start to transition. Now, my opinion of not needing international stocks might be the single most controversial opinion I have, the one that is most at odds with the vast majority. In fact, as far as I can tell everybody else who talks about this. And so frequently, people will say to me something along the lines. Well, J.L., I understand what you're saying. And I understand why you don't feel the need for international. I hear you, but I kind of still do.

I think I do want to add international into my portfolio. You're not going to get a big fight for me. If you feel that way, go for it. I don't have any problem with it at all. I kind of look at you and say, you're probably a little bit ahead of the curve, in my opinion. You're probably moving a little sooner than you need to. But by all means, it's not going to be a bad decision. At the end of the day, you're still going to do very, very well.

And by the way, rolling back to our early part of a conversation, that's also a point that's worth making. So if you follow, just to take one example, Paul Merriman's approach, the four-fund approach, it's not like you're going to do badly. And as I've already said, if you actually faithfully followed, you might even do a little better than what I'm recommending. That's a challenging thing to do. But the key is to be invested and engaged in staying the course over time. So all of these things will get you there.

I think my approach will get you there more reliably and certainly more simply. And it's a little easier to weather the ups and downs that can be so traumatic. But it's not like these things are bad choices. So if you add international and that makes you more comfortable, you're not making a bad choice. And you won't get a great argument for me. I just don't see the need. When you talk about a world fund, do you mean total international? Yeah, so again, I'm a Vanguard fan, and I can't think of the ticker, either the ETF or the fund offhand, but Vanguard has a world fund.

And the distinction is a world fund includes the U.S. So there are a lot of funds out there that are XUS. Right. So if you're in VTSAX, for instance, and you want to add the rest of the world, well, there are funds that do exactly that. my recommendation currently today to my international readers is make your life simple, buy a world fund, then it's taken care of. And then also has, because right now the U.S. is, as I said, about 60% of that fund. If that shifts, the fund will do that for you automatically. If China, which has a surprisingly small stock market, by the way, but if that increases, that'll shift automatically.

So that's where I would go. I don't see the need to complicate your life with two different funds. Now, an exception to that, by the way, is if you were holding VTSAX, let's say 10 years from now, you see the trend that I was just talking about evolving, and you say now it's the time to go international and you're in a taxable fund, well, you're probably not going to sell your VTSAX and take the big tax hit in order to go into the World Fund. And that would be a case where you could just add the International X-U.S. fund

and do the balance. But if I'm doing it inside an IRA or 401k or something, I'd probably just go ahead and make the switch to the World Fund and keep my life simple. Do you have any recommended allocation when that time comes? Well, again, I think the World Fund itself allocates it pretty well because it allocates it based on the size of those individual markets. So if you buy Vanguard's World Fund, and my memory, Paul, isn't good enough to tell you other than the U.S. You're going to get 60% U.S. You're going to get, I want to say, 30 percent EU, probably another 25 percent, something like that in the Asian markets.

Oh, so you would go entirely, you would make this switch entirely from VTSAX to world, including U.S. Barring a tax implication of doing that. Right, right. Yeah, absolutely. Okay. So again, if I'm... So you would still be essentially having...

One fund. Yeah, one equities fund. One equity fund portfolio. Right. Exactly. That's the beauty of a world fund. fund. It just makes your life so simple. And then as the world evolves, you'll benefit from that. What would be the indicators that would signal that it's time to make that move? What would be some

examples of those indicators? So, again, if you look at the trend from World War II, right, you start with the U.S. essentially, and I don't know the exact number of it, it had to be close to 100% of the world economy at that point, right? But now we're 60, and just looking at stock markets, by the way, not necessarily the economies, because China's a very large economy with a fairly small stock market, right? And, of course, we can only buy publicly traded companies, right? So that's the way I tend to look at it. And right now, the U.S., which might have been close to 100% of the world's stocks available at the time,

is now 60% because the rest of the world has come up. That's the trend that I would follow. Does the U.S. portion get down to 55, 50, 45? Maybe once it gets down under 50, I begin thinking about making a shift. Again, I don't see this happening anytime soon. This is not like the daily trading in the stock market where it fluctuates dramatically. This is going to be a gradual barring some sort of unforeseen. economic change would be a gradual kind of thing that you can pretty easily keep your eye on.

If and when you decide to pull the trigger is sort of a personal decision. But that's the kind of thing that I would look at. And so that's why I say maybe it's 60%, which is where we are today, you say, you know what? Yeah, I think I want to pick up that other 40%. So I'm going to do that World Fund deal now. And that's why you won't get any pushback from me. But if we were still at 80%, I'd say, yeah, you probably don't want to do that. Would you add in a world bond allocation as well?

Bonds are an interesting thing. In my world, you add bonds when you're living on your portfolio. Because when you're growing your wealth, if you're following the simple path, you are shifting part of your earned income, hopefully a significant part, into buying your freedom, which you do by buying assets, and in particular a total stock market or an S&B 500 fund, and you're putting money in on a regular basis, depending on how your income flows in. So weekly, monthly, whatever it is,

that smoothed the volatile ride of the stock market for you because you're going to keep jumping that same amount of money in every time. Is the market plunged back in February, March, whenever it was, went down about 20%, well, you would have picked up shares at a bargain price. That's how it smooths the ride for you, right? So if you're doing this, market drops become something that you not only don't have to worry about, but they become your friend.

You're buying things on sale. But when you're living on the portfolio and you no longer have that earned income that you're channeling into your investments, most people are probably going to want something else to smooth the ride. And that's the role that bonds play. So circling back now to world bonds, I think I'd be more comfortable just being in U.S. bonds because the world bond market gets a little bit squirrelier, a little bit tougher in regulation. So that would be my preference and probably for an awful long time.

Yeah. Many countries have higher default risks and greater risks generally. Although you are seeing now Treasury yields spike. They are. They are indeed. So there's quite a bit of risk, even with U.S. bonds these days. Yeah, well, I doubt that there's quite a bit of risk in treasuries, but it's not moving in a great direction.

Was it Moody's that just recently downgraded the U.S. And they were the last of the three big credit rates to do it. Exactly. So, by the way, that indicates that's not a huge change, but it's certainly not something that you want to see happening. But it goes back to the old analogy, of what's the cleanest shirt and the dirty hamper. While I wish our credit was a little more pristine than it's become,

it's still the most pristine in the world. And we'll probably be that way for the foreseeable future. We're seeing interesting correlations that have historically existed start to get broken. So we're seeing treasury yields spike at the same time that stock prices drop, which is not something that we typically ever see. I mean, we saw it a little bit in 2022, but other than 2022, that's typically just not something that we normally see. And it's the type of behavior that you would more often find in a place like Argentina. Yeah, 2022 was remarkable.

It was one of the all-time, and might even be the single, you could fact check me on this, might be the single worst year for bonds in history. Right. But if it wasn't the worst, it was right up there at the top. Yeah. It was dramatic. Certainly the worst in my adult life. Well, mine too, and I'm a little bit older. How old are you?

I'm 74. Oh, well, happy birthday. Well, I'll be 75 the next birthday. So November 1st, you can wish me a happy birthday. But, yeah. So, yeah, I haven't seen anything happen to bonds like it did in 2022. Right. But I still think they can play the role that we're describing.

And, of course, back in 2022, when that was happening, my social media and blog were lighting up with our bonds over. And I said, well, let's roll back the clock a little bit. And if you go back to 2000, you had the tech crash. And the market dropped about 46%. And then in 0809, you had that debacle. And the market, I think that the lowest was 56%, if I remember correctly. And in that decade, the first decade of this century, the stock market returned a negative 0.63,

which doesn't sound terrible. it's not great. It's a negative return. And so people look at that as a lost decade. I look at it as a great opportunity. If you were following the simple path, you would have been accumulating shares of VTSAX for an entire 10 years at bargain prices. And if you'd gotten to say 08 or 09 and said, this has been a terrible decade in stocks, I'm done. If these stocks are over and thrown in the towel, you would have missed one of history's all-time great bull markets that we've had ever since. So, yeah, you shouldn't panic and sell when something bad happens to an asset class. That's kind of the natural part of the process. So I'm not overly concerned

about what's going on with bonds. We talked a little bit earlier about VTI. What do you think about all-in-one ETF funds? Funds of funds. So Target Date Fund is a fund of funds. And so So it has bonds and stocks and it has international stocks and international bonds. And as it gets closer to its target date, it shifts the allocation to be more conservative, which is to say more bonds. And then there's a very similar fund of funds. And I can't think off the top of my head what they're called. But it's the same concept where they'll have international bonds, international stocks,

U.S. the same, and typically cash, like a money market fund. But it's not linked to a date. So that portfolio allocation doesn't change. So if you want something that holds a particular allocation, you can buy it that way. I think those are great options. You've got to buy one fund. And then maybe when you're living on the portfolio, you got a second bond fund. And oh, that's so complex.

And then you're going to want to rebalance those two funds. If that's too complex for you, if you really don't even want to think about that, Then I think a fund of funds, a target date fund, or one of these others that the name's alluding me for. That's not the best option, but it's a viable option. And as we talked about a moment ago with some of these other options, it's not like they're going to be a bad choice. It'll serve you well. And the key thing, the most important thing, is that whatever approach you use, whether it's Paul Merriman's or mine or a target date fund, is that you state, the course, you continue to pour money into it and let it do its work for you.

As time is your friend and compounding is what you're looking for. You know, it strikes me that your approach is essentially a one fund portfolio while you're in the accumulation phase. Correct. And then a two fund portfolio while you're in the decumulation phase. So you probably won't decumulate because actually it's probably going to continue to grow, but yes, when you're living on the portfolio. Exactly.

Yeah. Yeah. And that's actually a one fund slash two fund portfolio, which is what you advocate, is not that far off from a four fund portfolio, which is what Paul Merriman advocates. Exactly. And that's why I don't have any strong argument against what Paul's recommend. If you were interviewing Paul, he would say the same thing. Say, hey, I think what I'm doing is optimal and here's why. But if you're not quite comfortable with that and you're looking at J.L. Collins, you're going to be fine. So I think it's the same kind of thing. One of the challenges, by the way, that I get with this one fund idea is people said, well, that's not diversified. Isn't diversification important? And my response to that is, well, first of all, you're correct, it's not diversified in that it is strictly equities, which is what we want when we're building our wealth because there is no more powerful growth tool available to us than stocks.

but when it comes to equities, it's extraordinarily diversified. I mean, VTSAX holds something like 3,600 different publicly traded companies. You own VTSAX, and in every company, 3,600 companies from the factory, Florida, the CEO, they're working to make you richer. When I first started investing, when indexing was new and I didn't know about it, the idea of a diversified portfolio wants something like, do you want to pay? pick about eight, maybe 10 sectors, and you want to pick one or two companies in each of those sectors because nobody can really follow effectively more than 15 or 20 companies, and

you'll be plenty diversified. So when I can, with one fund, own 3,600 companies, I feel I'm pretty well diversified. Yeah, 15 to 20 companies is not diversification at all. I mean, it's actually a very, very small basket. But it was back in the day. That was the very definition of it. Wow. It was realistic because if you're owning individual companies, the problem with owning individual companies is now you really have to pay attention. Right. With VTSAX, my holding period is forever.

And then my airs, the holding period, will be forever because it's self-cleansing. So back in the late 60s, early 70s, you know, when I was riding dinosaurs around and what have you, there was a concept called the nifty 50. and the Nifty 50 were simply the 50 largest most successful U.S. companies. And the concept was all you had to do is buy these 50 companies. Put your stock certificates. By the way, that was actual paper certificates that they would mail to you showing that you own these things. Put them in your bank and you're done.

You never have to make another decision. The problem is, as we talked about earlier, with Sears as an example, Sears was in the nifty 50, Polaroid, probably nobody listening to us knows who Polaroid was, Xerox, you know, all these companies that were hugely dominant at the time have come and gone to be replaced.

So if you own the Nifty 50, there'd be probably a few companies that were still around, but it would not have served you well over decades. I used to say, if you look at the Dow Industrial Index, 30 stocks, right? Everybody knows the Dow. I think it was originated sometime in the late 1800s. I used to love to ask the question. So how many of those original companies you still think are on the Dow today? And the answer when I first started asking that was one, and it was GE. And this is back in 2011. Well, GE has since fallen off. So there's not a single company in the Dow that was there

originally. And that goes back to what we were talking about earlier. Companies come and go, sectors rise and fall. And the index fund takes care of that for you. What a great conversation that we just had with J.L. Collins. We covered a ton of ground today. We talked about why he believes that simple beats mathematically optimal because of the realities of human behavior. We talked about his take on how index funds are self-cleansing and automatically adapt as the economy changes. And we defined a total stock market fund, something that gives you ownership in 3,600 companies. Here's what we didn't do. So we've only gotten through about half of the questions that my most engaged newsletter subscribers sent in. We've got a lot of amazing questions that are still to come.

So in part two of this interview, which is going to drop next week, we're going to tackle the really meaty questions about retirement withdrawal strategies, about how J.L. Collins thinks about spending after you've, quote, unquote, won the game. We're going to talk about his very controversial take on international diversification. We're going to discuss what happens after you actually become financially independent. We'll deep dive into questions about business ownership versus investing in the public markets. And he's going to share personal stories from his own journey in transitioning from corporate life into FI, financially independent life. All of that is coming up in part two, which we're going to air next week. So make sure you're following this podcast in your favorite podcast playing app, Spotify, Apple Podcasts, Pandora, whatever it is you used to listen to this show. make sure you're following us in your favorite podcast playing app and tune in to our part two episode,

which we are going to air next week. Now, with that said, let's get to three key takeaways that came out of today's conversation. Key takeaway number one. Simple beats optimal when it comes to human behavior. There's a debate in the personal finance world as to whether you should pursue a path that is simple versus a path that is mathematically optimal. And J.L. Collins argues that the mathematically, quote-unquote, best investment strategy is not the one that will necessarily make you the most money in real life. More complex approaches like Paul Merriman's for fund portfolio or the efficient frontier, these, when followed, could theoretically outperform.

But J.L. Collins believes that most people won't stick with the discipline that is required to execute these strategies properly over the span of the next several decades. The challenge is, I have enough trouble getting people to stay the course with just VTSAX, right? The idea that somebody is actually going to take those four funds, faithfully rebalance them over the course of, say, 20 years, which is going to require them, by the way, to be selling the ones that are performing best to buy and the ones that are lagging, that just goes so much against human nature from my experience that I don't think anybody is ever going to execute that.

So in the argument between the simple path versus the optimal path, JL's position is to follow the path of simplicity. And that is key takeaway number one. Key takeaway number two, index funds are self-cleansing. they automatically adapt to economic changes. I asked J.L. if he was worried about the fact that index funds are pretty tech dominant right now. He used historical examples to explain why he's not.

He says that throughout history, there has been an automatic rotation of companies and sectors that have at times dominated various indices and then receded, and that is a feature, not a bug. So he talked about big dominant companies like Sears. Sears used to be the Amazon of its day or the Walmart of its day, and eventually that fades away and new leaders emerge. Sears was the Walmart and Amazon of its day combined. So Sears was a retail company that was started in the late 1800s, and it was brick-and-mortar stores to begin with, and somebody at Sears said back in the day, there are a lot of Americans living out in the countryside, rural America, and they don't have access to stores. But you know what we could do?

we could send them a catalog with all of our stuff in it, and then they could order stuff out of that catalog, and we could mail it to it. What does that sound like? That's Amazon. Index funds are self-cleansing. That's the second key takeaway. Finally, key takeaway number three.

J.L. argues that you don't need perfect diversification because by buying one total stock market fund, you get 3,600 companies. He pushes back against the common criticism that a single index fund isn't diversified enough. And he points out that when he started investing, people would own 15 or 20 individual companies, and they would do that in order to be, quote, unquote, diversified. But today, getting a total stock market index fund gives you ownership in 3,600 companies across every sector.

I mean, VTSAX holds something like 3,600 different publicly traded companies. You own VTSAX. and in every company, 3,600 companies for the factory Florida's CEO, they're working to make you richer. The idea of a diversified portfolio, you want to pick about eight, maybe 10 sectors, and you want to pick one or two companies in each of those sectors because nobody can really follow effectively more than 15 or 20 companies, and you'll be plenty diversified. Those are three key takeaways from part one of this two-part episode series of our interview with J.L. Collins. Thank you so much for tuning in. If you enjoyed today's episode, make sure you're following us in your favorite podcast playing app so that you can catch part two.

Also share us with your friends, your family, your neighbors, your coworkers, your dog walker, your babysitter, your swim coach, your soccer coach, your microwave repair guy, the person who mows your lawn. share this with your accountant, your bookkeeper, your kids elementary school librarian, share this with all of the people in your life. Because that is the most important way that you spread the message of F-E. Also, please open up that favorite podcast playing app of yours and leave us up to a five-star review. And don't forget to subscribe to the newsletter, afford-anything.com slash newsletter. Thank you again for being part of this community. I'm Paula Pant. This is the Afford- Anything podcast. and I'll meet you in part two of today's interview coming up in just a few days. See you there.