Stocks — Part XIX: How to think about money

Level I: It’s not just about spending

Get yourself a nice, crisp one of these:


Or one of these:

100 aussie

Or one of these:

100 euro

Or one of these:

100 pounds

Or one of these:

100 canada

Or one of these:

2000 czech

Or about 16 of these:

10000 Tanz shilling note

Now prop it (or them) up on the table in front of you, or in your imagination, and give some thought as to what it means to you. For instance….

  1. You might think about what you could buy with it right now. $100 buys a very nice dinner for two at a good restaurant. A fancy pair of sneakers. A tank of gas for your big-ass pick ’em up truck. A few bags of groceries. Maybe a nice sweater? I dunno. I don’t buy much stuff, so this is hard for me. I did just buy a $119 LL Bean bed for my dog. It’s going back. He won’t sleep in it.
  2. You might think, Mmmm I could invest this money. The stock market returns somewhere between 8-12% a year on average. I could spend that each year and still aways have my $100 earning more for me.
  3. Or you might think, but inflation and market drops are a concern. Mmmm. I’ll invest my $100 but only spend 4% a year. Any extra earnings I’ll re-invest so my $100 grows and the money it throws off keeps pace with inflation.
  4. Or you might think, I’ll invest this money and I’ll re-invest what it earns and re-invest what that earns and years from now, after the power of compounding has worked its magic, I’ll think about spending.

You can probably come up with other variations (and if you do I hope you’ll share them in the comments) but looking at these it’s easy to see that one view will keep you poor, one will get you in the middle class, one will elevate that a bit and the last will make you rich.



Mike Tyson

Photo courtesy of Wikipedia

Mr. Tyson was one of the most intimidating and formidable boxers of all time. Few have mastered the Sweet Science better. The Dismal Science, not so much. After earning some 300 million dollars, he wound up bankrupt. A lifestyle reputed to cost some $400,000 a month didn’t help. And as is always the case with the suddenly wealthy and financially unaware, I’m sure he was surrounded by sharks looking to bite off chucks of that fortune for themselves. But the root problem is he apparently only understood money in terms of buying stuff.

I don’t mean to pick on Mr. Tyson. (I’m not NUTS after all.) In this, he is not alone. The world is filled with athletes, performers, lawyers, doctors and business executives and the like who have been showered with money that flowed right off them and into the pockets of others. In a sense, they never really had a chance. They never learned how to think about money.

It’s not hard. Stop thinking about what your money can buy. Start thinking about what your money can earn. And what the money it earns can earn. Once you begin to do this, you’ll start to see that when you spend money, not only is that money gone forever, so it the money it might have earned. And the money that money might have earned. And so forth.

Clearly, none of this is to say we should never spend money. Rather it is to fully understand the implications when we do. Consider buying a car for, let’s say $20,000.

For even the least financially sophisticated it should be obvious that if you buy the car you no longer have the 20 grand. I sure hope so, anyway.

But, distressingly, it appears that most people don’t understand that in choosing to lease or borrow money to buy the car they are basically saying, “Geez. I don’t want to pay twenty thousand dollars for this car. I want to pay much, much more.” My guess is that if you are reading this blog you are already more financially aware than most and you get that. Debt makes anything cost more.*

Level II: Consider Opportunity Costs

But what you might not have considered, and what I’d like you to look at today, is the concept that even paying cash, that car is going to cost you far more than $20,000. There is an opportunity cost to no longer having that money available to work for you. And it’s easy to quantify.

All you need do is select a proxy for how the money could be invested and earning for you. Since I am forever talking about VTSAX, let’s use that.

Since VTSAX is a total stock market index fund and the market provides average returns of 8-12% annually, we have a tangible number to compare. Let’s use the lower end of the range: 8%.

At 8% 20k earns $1600 per year. So your 20k car actually costs you $21600. But that’s just the first year, and of course you are suffering this opportunity cost every year. Over the 10 years you might own the car, that’s $16,000. Now your 20k car is up to 36k.

But that’s really still understating things. We haven’t even considered what those annual $1600 chunks could have been earning themselves. And what those earnings could then have been earning. And what those….

Oh, should you not already be depressed enough about all this, remember that the 20k is gone forever and so is the $1600 in lost earnings year after year with no end. Expensive damn car.

You have probably heard of The Magic of Compounding. In short: “The money you save earns interest. Then you earn interest on the money you originally save, plus on the interest you’ve accumulated. As your savings grow, you earn interest on a bigger and bigger pool of money.” It’s a beautiful thing.


By Rebekah Bogard

Think of Opportunity Cost as its Evil Twin.

One of the beauties of being financially independent (FI) is that by definition you will have enough money so that the power of Compounding is greater than the Opportunity Cost of what you spend. Once you have your F-you money, all you need do is make sure you continue to reinvest to out-pace inflation and keep your spending below the level your stash can replenish.

But if you are not yet FI and you see this as an attractive goal, you’ll be well served to look at your spending thru the prism of opportunity cost.

Level III: How to think about your investments

Warren Buffett is rather famously quoted as saying:

Buffett quote

Unfortunately, too many people take this at face value and then leap to the conclusion that Mr. Buffett has found a magical way to dance in and out of the market avoiding the drops. Not true.

In this interview you can listen to exactly what he says about this: You can’t successfully dance in and out of the Market. My favorite line appears at ~1.34:

“The Dow started the last century at 66 and ended at 11,400. How could you lose money during a period like that? A lot of people did because they tried to dance in and out.”

The truth is during the crash of 2008-9 Buffett lost about 25 billion dollars, cutting his fortune from 62B to 37B. That left over 37 being the reason I was wandering around at the time irritating friends by saying, “Gee. I only wish I could have lost 25 billion!”

What Buffett didn’t do is panic and sell. In fact, he continued to invest as the sharp decline offered new opportunities. As the market recovered, as it always does, so did his fortune. So did the fortunes of all who stayed the course.

Now there are likely many reasons Mr. Buffett didn’t panic as that 25 Billion Dollars and all the potential it represented slipped away. Having 37 billion left surely helped. But another key is probably how he thinks about the money in his investments.

Also rather famously, Mr. Buffett talks in terms of owning the businesses in which he invests. Sometimes in part as shares and sometimes in their entirety. When the share price of one of his businesses drops, what he knows on a deep emotional level is that he still owns precisely the same amount of that company. As long as the company is sound, the fluctuations in its stock price are fairly inconsequential. They will rise and fall in the short-term, but good companies earn money along the way and in doing so their value rises relentlessly over time.

We can learn to think in this same way. Again, let’s use VTSAX in exploring this idea.

Suppose yesterday you said, “Mmm. This idea of owning VTSAX makes sense to me. I’m gonna get me some.” And having said that, you sent Vanguard a check for $10,000. At yesterday’s close the price of VTSAX was $41.16. Your 10k bought you 242.9543244 shares.

If a week from now VTSAX shares are trading at 43, you might say “Mmm. My 10k is now $10,447. Yippee. That jlcollinsnh sure is smart.”

If a week from now the shares are trading at 40, you might say “Damn. My 10k is now only $9718. That jlcollinsnh is a bum.”

That’s the typical way average investors look at their holdings. As little slips of paper or, more accurately in this day and age, little bits of data that go up or down in value. If that’s all they are, drops in the price other people will pay you for them on any given day can be very, very scary.

But there is another better, more accurate and more profitable way. Take a few moments to understand what you really own.

At 43 per share or at 40, you still own the same 242.9543244 shares of VTSAX. That in turns means you own a piece of virtually every publicly traded company in the USA, 3317 last time I checked.

Once you truly understand this, you’ll begin to realize that in owning VTSAX you are tying your financial future to that of virtually every publicly traded company based in the most powerful, wealthiest and most influential country on the planet. Companies filled with hard-working people focused everyday on prospering in the changing world around them and dealing with all the uncertainties it can create.

Some will fail, losing 100% of their value. Actually, they don’t even have to fail and lose all their value to fall off the index. Just dropping below a certain size or what’s called “market cap” will be enough.

Those will fall away and be replaced by other newer and more vital firms. Some will succeed in a spectacular fashion growing 200, 300, 1000, 10000% or more.  There is no upside limit.  As some stars fade, new ones are always on the rise. This is what makes the index, and by extension VTSAX, self-cleansing.

If I were to seek absolute security (a very different thing than the smooth ride most mistake for safety) I’d hold 100% in VTSAX and spend only the ~2% dividend it throws off. Or maybe a variation like the last portfolio option I describe here.

Nothing is sure, but I can’t think of a surer bet than this.

In Closing: 

We live in a complex world and the most useful and powerful tool for navigating it is money. It is essential to learn to use it. And that starts with learning how to think about it. It is never too late.

Oh, and somebody please send Mr. Tyson a link to this site. It’s not too late for him either.

Addendum I: 

Over on Street Smart Finance, Shilpan just published a very nice interview with Mr. Money Mustache and me. In the introduction he refers to me as “someone as financially savvy as Mr. Bogle.” That would be Jack Bogle. As in the founder of Vanguard and the inventor of index funds.

While I’m as prone to wallow in praise as the next guy, this is more than a bit over the top. I just write about the things Mr. Bogle created. A candle in comparison to a wildfire. But I’m honored that anyone would see even a candle’s worth of the same flame in me as in him.

If you care to, check it out here.

 Addendum II:

My thanks to Paul for his comment below which reminded me of something I wanted to share. We have two spots now open on the Ecuador Chatauqua trip. Unfortunately for the worst possible reason.

Tragically a gentleman who had signed up to come with his wife has suffered a very serious coronary. Our thoughts and prayers are with him and his family, and I hope you’ll take a moment to add yours. From a purely selfish point of view, and having learned a bit about them, I am especially sorry not to have had the chance to meet these particular people. Hopefully he will heal quickly and completely and we’ll get the chance to hang out together on another trip.

Addendum IIb:

I’m pleased to report he has stabilized and appears to be on the mend!

Addendum III June 30, 2013: 

*Shilpan of Street Smart Finance just sent me this great Ted-Talk We Need to Start Hating Debt Again. An 14 eye-opening minutes.

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Important Resources

  • Talent Stacker is a resource that I learned about through my work with Jonathan and Brad at ChooseFI, and first heard about Salesforce as a career option in an episode where they featured Bradley Rice on the Podcast. In that episode, Bradley shared how he reached FI quickly thanks to his huge paychecks and discipline in keeping his expenses low. Jonathan teamed up with Bradley to build Talent Stacker, and they have helped more than 1,000 students from all walks of life complete the program and land jobs like clockwork, earning double or even triple their old salaries using a Salesforce certification to break into a no-code tech career.
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  • Betterment is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
  • NewRetirement offers cool tools to help guide you in answering the question: Do I have enough money to retire? And getting started is free. Sign up and you will be offered two paths into their retirement planner. I was also on their podcast and you can check that out here:Video version, Podcast version.
  • Tuft & Needle (T&N) helps me sleep at night. They are a very cool company with a great product. Here’s my review of what we are currently sleeping on: Our Walnut Frame and Mint Mattress.


  1. Michelle says

    Great article, Mr. Collins. You’re definitely more than a candle in the financial lives of people like me who had not the slightest idea on how to invest in stocks, before I read your blog, besides all the other things all of us your readers learn from you. 🙂

  2. Shilpan says

    You are too humble to think that you are a candle. Keep in mind that a candle can rekindle someone’s financial journey, especially those who have found themselves in the dark hole of debt and financial despair and don’t know how to climb out of it.

    It was an honor to have you and Mr. Money Mustache share your wisdom so that no one has to follow the footsteps of Mr. Tyson(only in financial choices).

  3. Paul says

    Where were you twenty years ago? I could have achieved FI just by not spending (or is it losing?) money I spent on “expert” recommended investments, well-meaning co-workers and financial advisors who drive Porsche and BMW’s (but always seem to be broke and seeking more money). Thank you, for I have truly learned more from you and your stock series than the previous decade of self-study and advice combined. Wish I could be with you in Ecuador.

    • jlcollinsnh says


      20 years ago I was learning this stuff the hard way: expensive mistake after expensive mistake. 🙂

      Glad to provide the short cut for you and anybody else who might be interested.

      And thanks for the reminder on Ecuador. We just had a couple drop out and two spots open up. I meant to add that as an addendum to this post, which now I’ll do!

  4. Mrs EconoWiser says

    Hi James,
    Thanks, this sure helps a lot in visualizing what one actually buys when buying index funds. And I especially love the car comparison. I’ll do the calculation next time I think I want (or worse “need”) something in order to figure out whether that thing is worth the cost of not investing it.
    I’m off now to read the interview. Oh, and thanks for the link to my site!
    Love from Holland!

    • jlcollinsnh says

      Thanks! If I’d known this series was going to grow this far I’d have avoided the Roman Numerals. 😉

  5. cv says

    Dear Jim

    Thanks so much for your words of encouragement! As a investment newbie, I get nervous even when the market takes a 3-day dip (laugh hysterically, please!). So my treat to myself is to look at an entry in your blog once a day, and to remind myself the long term goal of reaching FI. Starters need coaching and empowerment! My own father is an ultra conservative “lets do it all with a CD” kind of a guy, so in this matter I look up on you as my guiding light and father figure. I hope you have a good father’s day with your daughter and family!

    • Kim says

      My father was the same! “Put your money in a CD, not just in your savings account.” Bless him! I really miss him today of all days!

    • jlcollinsnh says

      Back in the day both your dads were on to something. Time was CDs paid a decent interest rate. Of course, inflation was higher then too. The trick was always to make sure the “spread” was enough actually increase value after inflation.

      Right now my money market account pays .01% — effectively zero and after even today’s modest inflation, a loss over time.

      I can remember in the early 1980s MMfunds paid 16-18%. But inflation was running around 20% so those too were really no bargain.

      Sorry your dad is no longer with you Kim.

      Hope all the dads and their kids out there had a great father’s day. I know I did with mine!

  6. Done by Forty says

    Thank you so much for this post. I’m going to start thinking more about the number of shares and less about their value going forward — maybe I’ll start tracking this along with net worth.

    Tracking opportunity costs along with my spending figures may also be motivating…

  7. Kim says

    Great post! I really enjoyed the car analogy. Hope you are having a wonderful Father’s Day with your family.

  8. Scott says

    “you own a piece of every publicly traded company in the USA”

    If you look up the CRSP “total” index definition, you’ll find that it’s actually not everything. It’s enough to get to 99.5% of the total capitalization of the market.

    Per Wikipedia, the Wilshire “5000” contained 3692 back in October 2012, so there are probably a few hundred you don’t own in VTSAX.

    That said, the difference is far too small to care 😛

    • jlcollinsnh says

      Hi Scott…

      I need you to do me a favor. If you are going to introduce such arcane topics into the conversation please take the time to explain fully what you are talking about.

      As it is, you comment is confusing at best and misleading at worse. You put me in the position of either trashing it or taking my time to explain it.


      CRSP is The Center for Research in Security Prices and readers who care can find more detail here:

      Among other things, these guys are in the business of creating and tracking various stock indexes including one they call CRSP US Total Market Index. As of June 3, 2013 this is the index Vanguard uses in constructing VTSAX. Prior to that they used the MSCI US Broad Market Index. The Wilshire 5000 index hasn’t been used since 2005.

      Vanguard is continually seeking the best possible index source and, at least for now, in their judgment that is CRSP’s. Works for me.

      Now one of the concepts I introduced in the post is that VTSAX is “self-cleansing.” This is because the index itself is self-cleansing. In fact, that is a large part of what CRSP does in creating and maintaining it.

      So let’s talk a bit more about what self-cleansing means. Companies rise and fall. Of course not all are publicly traded, but when one makes the jump it is usually robust enough to be added to the indexes. To stay there they need to maintain a certain size, called market cap, and enough “float” in their shares. Float is Wall Street slang for the number of shares available to trade. This is most commonly limited by blocks of shares held in private hands such as the company founders and early venture capital investors.

      When a company’s market cap and or float drops below a certain level, CRSP (and their competitors) drop them from the index. Part of the art Vanguard is looking for in choosing an index to model is how well the organization creating it does this.

      Technically dropped companies can remain publicly traded. These are what are then called “penny stocks” and in the old days (maybe still today, I no longer pay attention) they were listed in what were called the “pink sheets.” Of semi-interest the reason they were called the Pink Sheets is that in the really old days, they were printed out on sheets of pink paper.

      So, the point of all this is that the CRSP US Total Market Index is not a static thing. It is fluid and changing. By extension and definition, so is VTSAX. For instance, as I said in the post on the day I wrote it, VTSAX held 3317 stocks. Today, three business days later, it holds 3434.

      Maybe instead of saying “of every publicly traded company” I should have said “of virtually every publicly traded company.” I’ll go ahead and make that change.

  9. SavvyFinancialLatina says

    Awesome words!! Thanks for the wonderful advice. It motivates me to figure out how to spend less, and save more, so in the future I won’t have to worry if my company decides to lay me off. Which is an act that is often way too common.

  10. Travis says

    Great article, Jim. It reminded me of one of my favorite books, The Richest Man in Babylon. Algamish was teaching Arkad about managing his gold and Arkad finally learned how to make his money work for him, but he was spending all his earnings before they could compound:

    To which Algamish laughed, ‘You do eat the children of your savings. Then how do you expect them to work for you? And how can they have children that will also work for you? First get thee an army of golden slaves and then many a rich banquet may you enjoy without regret.’ So saying he again went away.

    • jlcollinsnh says

      Thanks Travis…

      and welcome!

      It is no surprise that the ideas here brought to mind The Richest Man in Babylon. It is one of my very favorite financial books of all time and was a powerful and early influence on my thinking.

      I highly recommend it, with only this reservation:
      This slim little volume is so simple and easy to read, it can be easy to miss just how profound the truths in it are.

      Not the least of which is, this getting rich stuff really is very simple. Not easy, but simple. The very theme of this blog!

      Thanks for reminding me of it. Mmm. Maybe I’ll pull it down for a quick re-read! 🙂

  11. Kristi says

    Thanks for the great article! It helps to keep things in perspective and give encouragement. I think maintaining a balance and knowing what is truly important to you is one of the most important factors in maintaining this journey long term. Some things are worth trading in those precious dollars and future growth for but most of the times they aren’t.

    I would say staying on this journey just like investing in the index fund is self cleansing to your lifestyle as well. Over the years through trial and error you find out which things are worth spending on and which things don’t really bring you joy, they are just unconscious habits or hangups…and those things fall aways over time as you start to see the benefits of investing.

    I would say the one area we still struggle with is finding that balance of giving our son experiences or saving the money. We aren’t talking Disney trips or anything but more like visiting some national parks or driving to a different city and bumming around to get the experience of new places. We struggle with those kind of decisions. Now that your daughter is in college and you have some perspective on it…do you have any recommendations about balancing building a future while still enjoying a few experiences while the kids are young?

    • jlcollinsnh says

      wonderful perspective, Kristi, and I would suggest you answered your own question in your first paragraph.

      Let me only add that everything you do with your kids is an experience.

      As it happens, we took our daughter to Disneyland twice when she was young. Both times I was already in CA on business and she and my wife flew out for a weekend.

      She, as most little kids do, loved it. I despised everything about it. If when I die I go to hell as many have predicted and still more hope, I will be spending eternity in Disneyland. My vision of the devil is some guy in a 5′ tall Mickey Mouse suit.

      But some of the fondest memories she and I have of her childhood are the evenings we spent playing together while her mom was off at class. Building towers with her plastic tea cups and the like. Didn’t cost a dime.

      • Kristi says

        I had to laugh when you mentioned your thoughts on Disneyland. About a year ago, we seriously debated planning a trip to Disney World…because you know that’s what every kid’s dream is, right? Well, we ordered the vacation planner and they sent us a DVD highlighting all the parks. All three of us felt like we had to go sit in a dark quiet place afterwards from all the overstimulation and that was just from the video.:) So from then on we realized we are not really theme park kind of people 🙂 and our son has inherited that from us as well which makes things easier.

        My son would also agree with you about his favorite memories he’s had with us which would include building lego castles, spending hours reading books out loud, biking around town, or renting a movie from the library. Have a great day!

  12. Jake @ CC Wealth says

    This is great advice. I tend to be one of those people you described above where I’m either praising or cursing the market on any given day. Even though I pay attention to it frequently, I’m not jumping in and out. I know I have 30-40 years for that money to grow, so I’m going to let it do just that (while constantly adding to it).

    • jlcollinsnh says


      Print out your comment and tape it to your refrigerator.

      When the next plunge comes, and it will, it will be there to remind you. 🙂

  13. Wrightius Maximus says

    How about bundling all the posts into an ebook and selling for a few bucks? Then I can keep all your knowledge for eternity (well give it to the kids anyway). I fret that this site may not be here one day and where will I go for my investment fix?

    • jlcollinsnh says

      I don’t know about all the posts, but I am planning one built around the stock series. Nice to hear there some interest!

        • cv says

          I would personally like a hard copy (or a few) so I can pass it around, especially to my friends who are blessed with kids. I just wish I have my own to pass onto; these are truly great words in a confusing world and a confusing time.

          • Wrightius Maximus says

            Yes. The stock investing series and the simpler path to wealth and the smoother path to wealth at the beginning. The philosophy is most important.

          • jlcollinsnh says

            Pretty much what I was thinking. In fact I’m going thru the posts reminding myself what’s there and next will be oganizing.

            Any thoughts on a title? The Simple Path to Wealth seems the obvious one…

  14. Marc B. Allred says

    Stumbled on your blog and I love it. Just love it.

    I’m a 33-year-old with not much cash on hand but I have a little I’ve shoved into a 401k from the past 3 years. I feel like I’m TOTALLY behind on learning how to handle money and I really appreciate stuff that you and others like Mr. Money Mustache are doing. It’s teaching me HOW to do the stuff I was never taught and more importantly, you’re showing me it’s not as hard as I’ve always thought it was.

    I think I’m just like your daughter from one of your posts – I just haven’t wanted to deal with figuring out money. But for me it’s because the issue has always seemed so overwhelming and no one has been around to hold my hand. I could always just get by.

    But with a wife and three kids in tow and a really good job I’m considering being crazy and leaving it all to be an entrepreneur in the next few years. I love this post and the idea that money is freedom. I’ve never looked at it exactly in the context and I needed that right now.

    What would your advice be for someone in my situation with no serious cash on hand and a meager 401k? How/where should I invest the money I have and will save over the next few years? I feel like I’m behind the curve, but still can make good choices. Any insights from your interesting mind would be awesome 🙂

    Thanks for what you write,

    • jlcollinsnh says

      Welcome Marc….

      Glad you’re here!

      At 33 you are plenty young enough to hit any money goals you might set. Start now, save 50% and you’ll be there in 15 years. Probably a lot less if a couple of things break your way. My guess is, since you are 33 and have little now, your toughest job is going to be to organize your life in such a fashion as to be able to save that 50%.

      If you decide to take the entrepreneurial path your biggest challenge will be supporting you’re family while you get it ramped up. So either way, you need to dramatically reign in your current life style.

      Let’s suppose you spend the next five years pursuing that dream. You pour your heart, soul and money into it. You work your tail off. And and it works! Dream fullfilled!

      Or you fail. You’ll be 38 and flat broke.

      As long as you are not also broken, which will be entirely in your hands, you will be now more employable than ever. You will have had a learning experience more formidable than the best business degree. Your range of talents will have exploded. If you handle yourself well, you’ll be even more attractive to employers who are desperate to have a bit of that spirit in their own organizations.

      You will also have trimmed your lifestyle and you’ll be perfectly primed to start fresh on the road to FI. And you’ll never have to wonder, What if?

      So, stick with your job and you could be FI by age 48.
      Fail on the entrepreneurial path after five years and you could still be FI by age 53.

      Consider this story:

      As for how to invest to get there, if you read this stock series you’ll know exactly what I’d do, why and what the risks are.

      Keep us posted!

      • Marc B. Allred says

        Wow. What an interesting perspective on entrepreneurial failure – I like it! And what a rare perspective because everyone I’m surrounded by thinks I’m absolutely insane for even considering following the ideas I have, simply because my current job is so highly coveted.

        I think most people in my position are afraid of failure and think it’s unrecoverable. But cast in the light you explained, which is exactly how I see it btw, it’s not the end of the world. Success OR failure is still a huge win. The failure is actually not even trying and staying put.

        Bien dicho.

        • jlcollinsnh says

          It comes directly from my own experience. I quit a fine job with a big title and salary, spent five years income-less and failed. The last couple of those years the project morphed into a consulting business. One day one of my consulting prospects offered me a job for more than I’d been making when I had quit. In the end, it cost me five years of income but for that I bought the peace of never having to wonder; What if? Which for me would have been a curse. Such was the price of my failure. 🙂

          In fact the biggest hardship was not financial at all. It was dealing with those “friends” and relatives who proved to be relentless naysayers. It is unpleasant to face the reality that many you might not expect will revel in your struggles. But even seeing so clearly which of the people around me those were was important to know.

          No regrets. Of course, as they say, your results may vary. I hope if they do it is in your stunning success!

  15. GamingYourFinances says

    Since you mentioned Warren Buffett I have to say that #1 and #2 remind me of Buffett’s biography the Snowball. It’s fascinating in the biography to read about young Warren Buffett’s obsession with building capital and reinvesting the returns. Even at a young age he understood that every dollar he spent was actually costing him thousands in future returns. If you haven’t read it yet it’s a truly fascinating read.

    • jlcollinsnh says

      Thanks for the recommendation. I confess I’ve never even heard of it, but it’s now on my list. Love the title!

  16. James Wilson says

    Market timing

    This week I decided to eschew market timing and turn $30k into a Vanguard S&P 500 index fund, despite what appears top be a high stock market.
    The money is intended to be part of my final mortgage payment on my 3 family house, which I intend to pay off in 3 years.

    I think some commentary needs to address smart market entry, as opposed to market timing. Like waiting until after statements from the Fed indicating the possibility of reduction of quantitative easing.

    Surely it will bounce back in 3 years, but perhaps putting the money directly into my mortgage would have been safer with my 3.875% mortgage interest rate.

    Or perhaps and S&P fund is not the appropriate instrument for such short term investing.

    What do you think?

    • jlcollinsnh says

      Hi James….

      This entire stock market series is about why and how to invest in stocks. In fact, I very specifically addressed entry in the last post:

      Investing in stocks is a long-term plan. Think decades, not years. A five year time horizon should be the minimum.

      What you are trying to do is time the market for a short-term 3-year gain. “smart market entry” is just a form of market timing. Nobody, as I’ve said here many, many times can reliably do this. Very risky.
      You might get lucky and have the next three years be a raging bull. But if it is, luck is exactly what it will be.

      As I write this, today is seeing sharp drops in the averages. Is this the start of a bear market or just a blip before it goes higher? Beats the hell out of me. More importantly, following the strategies I do and have outlined here, it doesn’t matter.

      But I’m not playing the very dangerous three year game as you are.

      If you’ve already invested your 30k you have two choices:
      1. If you must have this money in three years, pull it, take your loss and pay down the mortgage.
      2. If paying off the mortgage is not a requirement but only a goal, you can continue to hold your investment and hope for the best.

      Good luck.

      • James Wilson says

        Thanks for your insights.

        I did read the linked article, which in part emboldened me to invest.

        Paying off the mortgage is a goal, not a necessity, so I’m not really sweating it.

        I could almost as easily leave it in for a couple of decades.
        I’m 50, so I hope to have at least a couple of decades to ride it out.

        It might have been smarter to put it towards my mortgage, since my mortgage is 3.875%, which is close to the inflation adjusted long term stock gains described in the Trinity Study.

        It would be pretty foolish to get out now (buy high/sell low) so I guess I will ride it out and not worry.

        My savings rate is about $30k a year, do you think should I pay off my mortgage by an additional $30k a year, or keep the mortgage, and put all savings in the VFIAX? (It’s gotten much less expensive lately).
        Or should I just put it in the bank?
        I realize this may be subjective.

        I owe about $160k on the mortgage, which regular payments plus $2500 a month will knock out in 4 years. If my $30k in the market recovers in 3 years, I can finish the mortgage then in 3.

        If I work another 10-12 years; with the rental income from the house, and Social Security, a modest retirement may be possible, although I’m hoping to retire (modestly) sooner.

        As with money going to my mortgage, I guess I should think of money in stocks as permanently invested, where I should only withdraw 4% of principal.

        Once again, thanks for your insight and wisdom. Between yourself, MMM, and ERE I’ve learned a lot, and have become an avid student.


        • jlcollinsnh says

          My pleasure, James….

          But you have me a bit worried, especially when you say VFIAX has “gotten much less expensive lately.”

          Since it reach a high of around 1669 about a month ago it has pulled back to 1588 at the close today. That’s about 4.8%, half of which happened today. This has the media all aflutter as they love to be. My fear is that you are paying too much attention and getting spooked. Dropping 4.8% is nothing.

          10%+ is considered a “correction”
          20%+ is a bear market
          40%+ is a crash

          To be successful investing in stocks you need to KNOW these bad things are coming and be tough enough to hang on when they do. If you can’t do this, you will panic and sell at the worst possible times and you WILL lose money. This is why most people do lose money in the market.

          Your questions really can only be answered thru the prism of your temperament.

          My guess is that you should probably pay down the mortgage. I don’t think you are really ready for just how rough this ride can be.

          If you haven’t already, please take the time to carefully read (or re-read) my stock series before you invest another dime. Pay special attention to the many warnings in there regarding how rough it can be. Read thinking about the crash of ’08, when the S&P500 ground down from a high of 1527 to 683 in the spring of ’09. Now we know it recovered, but at the time the media was convinced it would keep collapsing. Holding on was very very tough.

          Please don’t take any of this as a personal criticism. (Hell, I panicked, sold and lost big in the crash of ’87 as I described here: More my concern that you’ve only picked up on the rosy half of the message around here.

          I wish for you nothing but the best!

          • James Wilson says

            Thanks for putting it in perspective!

            I panicked in early ’08, bailed out after a period of gains, and essentially broke even.

            I now understand that that was just luck, and gambling, not investing.

            I’ll be re-reading your excellent stock series.

  17. kyle says

    Really solid post, Jim. I found your blog via MadFIentiest and MMM and I’m officially addicted. Your advice is sound and I can’t wait to dive into your stock series in my downtime over the holidays. I just invested 10k in VTSAX before even seeing your praises, and your praises of the index make me smile even more.

  18. Andria says

    Question. So, I know VTSAX is recommended and that once you can live off of your dividends you can retire. But this fund has a low paying dividend. I would need a whole heck of a lot of money to get there. Are there any other recommendations? I I started late in life to get on the right path. I am 34. I feel like this is going to take me a very long time. : ( Just curious if I am looking at this correctly or maybe I am missing something.

  19. jcw says

    Opportunity cost has me re-thinking debt. I’ve always thought it better to pay cash for a major purchase than take a loan out for it. But, what about the opportunity cost of the money I have to pull out of investments to pay for the purchase? If I’m making 8% avg on my investment and I can get a 4% note on my new motorhome ($300K), aren’t I ahead of the game by taking out the loan?

    It’s enough to make my head spin.

    • jlcollinsnh says

      Theoretically, yes. But debt is so ugly, I’d avoid doing this for the most part.

      At 8% your investments are by definition volatile. While the 4% debt will be relentless.

      Last year stocks rose 30%+, but I wouldn’t take on 20% loans on the bet they will in the years to come.

      This comes more into play in considering when/if to pay off a mortgage. In today’s interest rate environment, 4% and under I’d keep. 6% and over I’d pay off. 4-6% is a toss up depending on temperament and opportunities.

  20. DealForALiving says

    Love the mindset of looking at money as 1, 5, 10, 20, or 100 little warriors fighting on my behalf to make more money. Great article that I’m sure I’ll come back to read again.

  21. Karl hungus says

    Okay, you’re gonna have to explain this compound interest to me. I understand the making interest on interest concept, but doesn’t that only work if you are actually getting paid out that interest every year? If you have index funds, you are maybe only getting 3% a year in dividends. How are you gonna make 8% on 8% on 8% if you are only getting 3%?

  22. Timothang says

    Hey love the blog!! I know you hate debt but maybe I can convince you that debt can be good in very specific cases. Example instead of paying off our hospital bill of 10K in a lump sum we are using a credit card with 0% interest for the first 18months. Then investing the 10K instead. We are at a point in our lives where we can easily liquidate assets to pay the 10K when the time comes. Same principle for buying cars. If you can get a loan at 72months for 2% all you have to do is beat that rate in the market and inflation is helping your car payment become cheaper with time as well. Now both examples assume you have the lump sum, will have the money when it comes time to pay the loan in full, and can find interest free or close to interest free debt. Anyway, enjoy reading your stuff and happy investing!

  23. Will says

    Hi Jim or any reader that can help me,

    Thanks very much for the insightful and fun posts!

    You’re comment about living on 2%VTSAX dividends for absolute security really interested me. From what I understand in a market crash this would leave someone who once had a $1.5M portfolio ($30k per year (liveable)) with $750K ($15K per year (very spartan)). They would now have to sell stock at rock bottom prices just to afford their expenses. Therefore would they not have ben better served with a portfolio 90%VTSAX / 10% bonds? In lean times this would give them bonds to sell for their expenses.

    I have read on this blog that companies don’t typically drop their dividends in crash times? Is this true for index funds and have you seen any research online that supports this?

    Continued: This comment really got me interested because before stumbling across your blog my plan for FI was to hold an index fund and live off the dividends without bonds. Here in the UK, Vanguard offer the FTSE all share income fund with a 3.5% dividend ( (alternate link in case Vanguard link doesn’t work:

    This fund could fund my FI lifestyle on a conservative 3.5% rule for an ultra simple path to wealth preservation and building. After reading your blog I realised that I might have to sell at the bottom if the crash comes and companies drop their dividend.

    Do you think that holding this fund and spending 3.5% per year is a secure smooth ride, or do you think I am likely to get caught out in lean times?

    Thanks so much if you can help!


  24. Carol says

    Aloha –
    Have a question re. thinking about opportunity costs. I like your example about buying a car since I have a feeling I may need to do that in the next few years (my car is >10 years old…starting to show its age but still running well). I’m not a big spender (although life still adds up living on a remote island!) and like to think I’m pretty smart with my money. I was thinking, when the time comes, I’d buy something used and practical, hopefully within the range of $10,000-$15,000. But based on what you’re saying I’d be totally missing out if I even spent that much. So what’s a girl to do if/when she needs a car?? Just suffer with the bus and invest that money instead? Suck it up and deal with it taking 3-4x as long to get everywhere I need to go? This would be a major lifestyle change and cause me to miss out on the activities that keep me sane…which I’d really rather not.

    I guess what I’m really asking is how I should look at these sorts of major expenses if they are more or less “critical”? Thanks. Also I love your blog and your sarcastic writing. 🙂

    • jlcollinsnh says

      Aloha, Carol!

      Nowhere in this post, or elsewhere in this blog, do I say “don’t buy a car” or anything else for that matter.

      The answer is in my Manifesto:

      “Life choices are not always about the money, but you should always be clear about the money choice you are making.”

  25. Miriam Andrade says

    Hi Mr.J Collins! I am a single parent just learning about investment and stock! I have two questions I’m not done reading this article but just to understand clearly when I do invest in stocks should I not have an advisor it seems like I can do this on my own but since I’m so new at it I’d have questions also if I don’t have the 3000 to start investing and I have just a little under maybe a thousand maybe 300 maybe 100 where else can I invest and use the similar strategy thank you great article

    • jlcollinsnh says

      Patience, Miriam. 🙂

      Keep reading and learning before you invest. Be sure you take the time to understand the “why” behind the “what”

      By the time you are ready, you will have saved the $3000.

  26. Miriam Andrade says

    Hi! I really am captured by your article, yet new to every angle! What does it mean to live off the 2% dividends?
    I’m not sure or I have to read more about that topic!
    Does this mean I will be withdrawing at some point?
    Also! When the market crashes, and your 1 million loses money, does some cash stay and lose some? I don’t understand why it’s not all lost, why does some cash stay safe so to not sell

  27. Quadian Warrior says

    I must agree with this post’s financial concepts, however giving credit to Tyson for being the master of boxing is something I would never do. Mike Tyson was a two-bit thug who raped a woman, went to jail, finally got into a professional fight, and when he was loosing bit his opponent’s ear off.

    **More on Boxing and Sportsmanship**

    Tyson was an unprofessional, criminal, thug, and undeserving of any recognition. I salute any financial shark that takes money from that thug, I think he gave professional boxers a bad name. He doesn’t deserve to have money, or to be held up in esteem. He needs to be locked up and shamed like the animal he is.

    George Foreman, Ali, and many other boxers won fights legitimately without biting off their opponent’s ears, and were not criminals. If we hold up a boxer as an example of someone who mastered the art, please pick one that was actually a good sportsman, not someone who bit off someone’s ear to win a fight.

    It does slightly enrage me to see someone that was a blight on the profession of boxing being held up in any way shape or form, and as a supporter of the second amendment and self defense I don’t personally care if a violent thug takes issue with my opinions.

    **On Investing**

    I would think the best investment a person could make when accumulating wealth would be a low expense index fund, bought through periodic investing over time, and then when entering retirement moving to a 50/50 portfolio consisting of a quality stock index fund and a decent bond index fund.

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