22 June 2016

Book review: The Simple Path to Wealth by JL Collins

I’ve always recommended JL Collins’ Stock Series to anyone interested in saving, investing and early retirement. JL now took the series and other posts from his blog, polished them and made into a book.

The good

Everything is explained very simply and JL uses a lot of stories. It’s also very short, so you won’t be bored reading it.

You’ll learn the basics about stocks and bonds, how the market works and that a very good investment strategy is actually very simple, with only two index funds. But more importantly, it will give you a lot of crucial advice for this endeavor.
  • There will be times when your portfolio drops 20% within a month and you’ll feel like you’ve made a huge mistake. The solution is simple: treat it as “Sale! Everything 20% off”. The book has a lot of other tricks to make you a calm investor.
  • Chapter III "It has never been about retirement" is the single best short piece I’ve read about the philosophy of saving and early retirement. If you need motivation for saving and investing, this book will give you plenty.
  • I also really like the final chapter on risk. No, you can’t be sure the 4% rule will work forever. You can’t be sure that Earth won’t be hit by an asteroid. We live in uncertainty, but having savings can only help you.

The bad

My biggest complaint is the incorrect advice about international investing. To be fair, most investing books are also somewhat incorrect, but JL goes too far and recommends only owning American companies. This is on three grounds: high risk, big American companies are global and it’s more expensive. I don't buy any of these 3 arguments.
  • It's true that international investing sometimes bears more risk, but this risk has also been rewarded, for example emerging markets over-performed the rest of the world by 2% yearly in the last 40 years.
  • The difference in price these days is about 0.1% in yearly fees between an American and a global fund. That’s a very small price for a much higher diversification.
  • JL says the world is getting more globalized and connected, so having only American companies is enough – you get exposed to all economies anyway (according to him). Increased globalization is happening, but the stock markets ignore that. Comparing last 15 years, emerging markets gained 6.4% yearly while developed world gained 3.3% (MSCI World IMI vs. MSCI EM IMI).
Some small complaints:
  • I wish the book used real (=inflation-adjusted) returns. If the index grew 12% yearly when 4% of that was inflation, saying that your wealth grew 12% is very misleading.
  • JL uses a Bell curve to illustrate the variability of stock returns, but to me Bell curve means lack of variability. In reality, stock returns have a long-tailed distribution and that’s one of the reasons why it’s so easy to under-perform the index.
  • I’m curious why JL didn’t mention Betterment (and robo-advisors in general), because he writes about it positively on his blog. In the book, he says multiple times his strategy is about simplicity. However, avoiding Betterment adds 3 times more complexity for an average person.

Final verdict

Go read the book, it’s awesome. Yes, there are factual inaccuracies, but you can correct that by reading All About Asset Allocation or A Random Walk Down Wall Street instead. This book excels in things that other books get wrong or ignore—the psychological and philosophical aspects of investing.

Disclaimer: I got an early copy of the book in exchange for review here and on Amazon. I won’t receive any compensation if it sells well, so I didn’t have an incentive for a good review.