In this episode of Executive Connect, Melissa Aarskaug sits down with JL Collins, author of The Simple Path to Wealth, to clear away the noise around investing and financial independence. JL explains why simple strategies often beat complicated ones, why market drops are part of the process, and why money should be treated as a tool for freedom, not status. He also shares timeless lessons on compounding, avoiding debt, starting early, and helping the next generation think differently about wealth.

Chapters:

(1:57) Early lessons on earning and saving

(5:54) The letters that became a book

(7:52) Why investing should be simple

(9:52) Investing versus trading

(14:56) Why index funds outperform

(20:32) How to think about volatility

(21:59) Why money should buy freedom

(27:23) The mistakes investors repeat

(36:08) What young investors should know

(43:29) Why debt holds people back

JL

(0:00) If you’re going to be a successful investor, you need to be in it for the long term. (0:04) You need to understand that market corrections, bear markets, crashes are a perfectly normal part of the process. (0:12) They are not the end of the world, which is what you would think listening to the media.

(0:16) They’re painful, but that’s what you have to endure. (0:20) That’s why stocks provide the premium returns that they provide, is that you’re willing to take on that risk.

Melissa

(0:27) Most people think building wealth requires complicated strategies, expert stock picks, constant market watching, and access to insider knowledge. (0:39) But today’s guest has spent decades proving the opposite. (0:44) JL Collins is the author of The Simple Path to Wealth, a book that has helped hundreds of thousands of people rethink money, investing, and financial freedom.

(0:55) What started as a series of letters to his daughter explaining how money really works, turned into one of the most influential guides to financial independence today. (1:07) This conversation is about cutting through the noise, what actually works, what doesn’t, and why the simplest path often is the most powerful one. (1:18) Welcome to the Executive Connect Podcast, JL.

JL

(1:22) Hey, Melissa. (1:24) Thank you for having me and thank you for that very gracious introduction. (1:30) I love it.

(1:30) I have to say that Jack Bogle is the guy who really created the kinds of concepts that I just talked about. (1:40) I’m always honored when people mention my name in the same level of his, but I’m quick to remind them if I’ve lit a candle in the darkness, Jack was a white hot sun, right? (1:54) So just to be clear on that.

Melissa

(1:57) I love it. (1:58) Well, if it’s not broke, why fix it? (2:00) So you’ve had one of the most interesting career journeys from selling flyswatters door to door as a kid to becoming a writer, investor, you know, following global markets.

(2:13) What did those early experiences teach you about money?

JL

(2:19) Yeah. (2:19) So the, the really early ones that you referred to, I was probably five or six years old when I was doing that. (2:26) My, my dad was a manufacturer’s rep in the, in the housewares business.

(2:30) And every year the companies that he represented would send him new samples. (2:36) And the really good stuff my mother got to sell, the smaller items like the flyswatters he, he’d give to me and I’d walk around our neighborhood door to door knocking on saying, you want to buy a flyswatter? (2:49) It was a nickel.

(2:50) It’s amazing me looking back how many people turned me down, but I guess the nickel was, was more money back in those days. (2:58) And, but it was a great, great experience. (3:01) I love doing it.

(3:02) I also used to pick old pop bottles up by the side of the road. (3:05) This was back in the day when people were more likely to throw trash out their car windows, including pop bottles, which you could get a 2 cent deposit return on when you hauled them into the grocery store. (3:17) So I, I guess I was pretty hardwired.

(3:20) I loved working and I loved making money from a young age. (3:25) I’m not quite sure where that came from because it started so young, but there was.

Melissa

(3:30) I love that because I think so much of who we are starts so young and I love that you kind of followed that. (3:36) And so what lessons back to those days when you were five about earning versus savings actually stood out to you when you were that young?

JL

(3:47) Yeah. (3:48) So I think in retrospect, although I certainly didn’t recognize it at the time, probably one of the things I learned was that hearing no was not a terrible thing. (3:59) I mean, I was, I think I was a reasonably cute little kid, right?

(4:04) And yet people had no trouble saying no. (4:07) And I was too young to realize that I should be bothered by it. (4:12) Right.

(4:13) So I guess I, I, I never really was terribly bothered by hearing no. (4:18) And that’s been a, that’s been a great asset over the years. (4:21) And then the saving part, I remember my mother was the one who encouraged me to save the money I made.

(4:27) And she used to tell me that, you know, if I saved it by the time I was 16, I could, I could buy a red convertible. (4:34) And that sounded even at my very young age, like a really good idea. (4:38) Of course, by the time I was 16, that wasn’t going to happen because our, our family’s finances were not in good shape at that, at that juncture.

(4:48) But, but that was the carrot she held out and tricked me with.

Melissa

(4:53) And I love that. (4:54) It’s great that you said that. (4:55) I think back to my childhood, I was babysitting for 99 cents an hour for three kids, which thinking back on how much I was making was, you know, so nominal, but you know, one of the things, you know, my mother did was she opened a savings account for me.

(5:11) And I started putting all that money in a savings account really young and kind of to your point, my, my mom told me the same thing. (5:18) Hey, if you save enough money, you could buy your, your own first car. (5:22) Cause we’re not buying it for you.

(5:24) Well, funny enough, that actually happened, jail. (5:27) I was 15 and a half. (5:28) I opened the newspaper.

(5:30) I found a car I wanted to buy. (5:32) I took it to my dad and said, I want to buy this car. (5:36) And he says, huh, with what money?

(5:38) And I, my mom was standing there cooking breakfast. (5:40) And she looked at my dad and said, well, she’s got enough to buy it, Tom. (5:45) And that’s how I ended up buying my first car.

JL

(5:48) And so your bank book and said with this money, I did, I did.

Melissa

(5:54) And my dad, funny enough, you know, my dad had no idea how much I had in there. (5:59) You know, money was being spent on this, that, and the other little, did he know my mom was spending their money on a lot of the things for me. (6:06) And so, and I love, you know, your book started, you know, your book started as a letter to your daughter, which is something I love and admire.

(6:14) And my dad still to this day writes me letters. (6:17) It made you realize those lessons could also resonate with a much larger audience. (6:24) So talk to me a little bit about what made you realize that lesson.

(6:29) Ready to lead smarter and invest wiser on the executive connect podcast. (6:34) We unpack executive strategies for wealth and influence hit the subscribe button. (6:41) Now don’t just watch act.

JL

(6:43) Well, so actually I don’t think I realized that lesson. (6:47) As you mentioned, I started out by writing a series of letters to my daughter about this stuff. (6:53) So when she was ready to hear it and listen, even if I wasn’t around the information would be, and then somebody suggested that I put it on a blog because it was pretty interesting stuff from their point of view.

(7:06) And I had no interest in a blog. (7:10) I mean, I barely knew what a blog was. (7:11) I’d never read one before, but I thought it’d be a great way to archive the information.

(7:17) So that’s what I did. (7:19) And then it started to develop an audience, which was never my intention. (7:25) I never was thinking I’m going to start a blog and have an audience and teach other people this stuff.

(7:29) I was just archiving information. (7:32) So I was, I was then, and even today with all the success, the blog and the Chautauquas and the books have had, I’m still a little bit stunned that anybody cares about this stuff. (7:43) I’m just grateful that my daughter embraced it.

Melissa

(7:47) Now, what were you trying to simplify for her in these letters?

JL

(7:52) Yes. (7:52) So the best way to put that actually comes after the letters. (7:55) I was trying to explain my investment philosophy that I’d come to after decades of making all kinds of mistakes and what have you.

(8:04) And the interesting thing about writing is it forces you to really think through, why do you believe the things you believe? (8:13) Why do you think the things that you think? (8:16) In my own mind, I was comfortable with that this was the correct path that I’d finally settled on, but being faced to put it down on paper and articulate it to somebody else.

(8:31) And my daughter requires you to really think through what you’re saying in ways that I found were very, very useful. (8:41) And, but the real defining moment was a few years later, when she was still in college, she came back and I, of course, immediately started lecturing her about this stuff again. (8:53) And she stopped me and she said, you know, dad, I get it.

(8:56) I understand that this stuff is important, but I’m not like you. (8:59) I don’t want to think about it all the time. (9:03) And that was an epiphany for me, Melissa, because I realized that I’m the odd one out.

(9:10) People like me are the odd ones out who enjoy this stuff. (9:14) Most people like my daughter can be very smart as she is very motivated to do cool things with her life, but this is not something she wants to think about, but she’s smart enough to recognize it’s important. (9:28) And that’s kind of the whole message behind the simple path to wealth is that you don’t have to think about this a lot.

(9:34) You have to understand a couple of very simple principles and you need to implement a couple of very simple steps and then you can forget about it. (9:45) And in fact, the more you forget about it, the less you tinker with it over decades, the better you will do.

Melissa

(9:52) And I love that because I do think, you know, there’s a lot that people misunderstand about investing. (9:59) And, you know, I talked to several of my friends and peers about how they’re investing, what they’re investing in. (10:06) And sometimes I find that, you know, some of them are the most successful in their careers and they’re not managing their money correctly, but they’re making a lot of money.

(10:17) And I don’t really decide to manage it until, you know, they’re in their fifties. (10:22) And when I think and have learned from them to start younger, because when you start younger, it compounds as time goes on. (10:30) So I’d love to get your perspective about why do people really misunderstand investing and kind of, to your daughter’s point, not take it seriously.

JL

(10:42) Well, I think the main reason is most of the messaging that people get about investing is really about trading. (10:52) If you turn on the TV, if you look at the business programs, it’s about how do you pick the next stock that’s going to go up and when do you sell it and pick the next one? (11:02) And it’s in trading is certainly part of the market, but it’s only part of the market.

(11:08) And I’m not a trader. (11:10) I’m an investor. (11:11) I want to own something for a long time.

(11:15) And basically what I own is low cost, broad-based index funds, and I can own them forever because they’re self-cleansing. (11:22) And we can get into what that means if you want to. (11:25) But this is even the most famous stock picker, Warren Buffett and Charlie Munger.

(11:31) They were looking for companies they could buy and hold for decades. (11:35) They were not traders either, but everything you hear in the media is geared towards trading. (11:42) Even when you hear about the rare high school that says, okay, we’re going to bring in a speaker to talk to our students about investing.

(11:52) They tend to bring in a stock broker who talks about how to trade stocks, which to my view is exactly the wrong message. (12:01) It’s great that you want to teach kids about this, but teaching them to trading stocks is the way to make money. (12:09) This is where the trope that the stock market is no more than a casino comes from, because if you’re trading stocks the way you see on TV, then that’s true.

(12:20) You’re really in a casino.

Melissa

(12:22) Yeah, so true. (12:24) That’s a great analogy as somebody who works in the casino gaming industry. (12:29) I’m curious, one of the things I love is your blog has evolved into this broader movement.

(12:39) What surprised you most about the book’s impact in the movement?

JL

(12:44) So I think just the sheer success of the book is what surprised me the most. (12:51) When I said about writing it, it took me three years to write it. (12:56) Writing a book, at least for me, is an awful process.

(13:03) Gloria Steinem was once asked if she enjoyed writing, and her reply was, I enjoy having written. (13:11) And that’s exactly right. (13:12) I love the fact that I wrote the book.

(13:15) Writing it was torture. (13:17) And I would frequently put it aside and say, why am I doing this? (13:21) Nobody’s going to care.

(13:23) And my editor would say, no, no, this is important. (13:26) This is going to matter. (13:27) People are going to care.

(13:29) And when I got near the finish line, I started asking around to people I knew in the book publishing world, what does success look like now that I’m doing this? (13:41) And they said, well, very few books ever sell more than 1,000 copies. (13:47) So if you sell over 1,000 copies, that’s a success.

(13:51) If you sell 5,000 copies, that’s really good. (13:56) I mean, you’re in pretty rarefied air at that point. (13:59) And if you hit over 10,000 copies, well, you’ve knocked it on the And I was thinking, well, I know what my blog audience is.

(14:08) I can probably do 10,000 copies. (14:10) So that was the limit of my expectations. (14:15) It’s sold well over a million copies.

(14:18) So I mean, I was not prepared for that.

Melissa

(14:20) And I love that. (14:21) I think writing a book, to your point, it was a really hard thing for me as I stopped and started. (14:26) And I ended up dictating some of the book because I just couldn’t sit still for long enough to write the book.

(14:33) But one of the things I love about your philosophy is simplicity wins. (14:42) So your philosophy changes much of what the financial industry promotes. (14:49) And so why do you believe simple investing strategies often outperform the complex ones?

JL

(14:56) So it’s not a matter of what I believe. (14:58) It’s a matter of what the research indicates. (15:02) So I mentioned Jack Bogle early in the conversation.

(15:05) And in 1975, which coincidentally is the year that I first began investing, Bogle created the Vanguard Group. (15:15) And he created the first index fund available to retail investors like us. (15:23) And he was the one who had done the research and he’d evaluated research of other people that indicated that stock picking underperforms the broad index.

(15:38) But that was heresy in those days. (15:40) And of course, one of the reasons it was heresy is brokerage firms made a lot of money promoting the idea that expert stock pickers could outperform the market itself. (15:54) And therefore, they were worth the premium that you as a retail investor would pay to have them do the stock picking, particularly in an actively managed fund.

(16:04) And Bogle said, no, there’s no research that suggests that that’s true. (16:08) And there’s lots of research, including what he did, that suggests that it’s not at all true. (16:16) And he came under enormous, he was accused of being un-American, among other things.

(16:21) But he was right. (16:23) And the decades since then have repeatedly proven that he was right. (16:28) And the research shows that in any given year, something along the lines of 25, maybe 30% of active stock pickers are going to outperform the market overall in one year.

(16:40) You go out five years, that number drops. (16:43) You go out 10 years, it drops further. (16:45) By the time you’re out 30 years, it’s less than zero.

(16:49) It’s statistically nonexistent. (16:52) So yes, in any given year, there are going to be pickers who outperform the market. (16:58) I mean, I had years when I was a stock picker where I did it.

(17:02) But doing it consistently over time, which is what matters, really doesn’t happen. (17:08) And when you layer on the extra expense that active management costs, that’s a big liability for them to overcome, pursuing something that just research indicates doesn’t happen.

Melissa

(17:22) Yeah. (17:22) And I love that because fees really, kind of to your point, fees erode the long-term returns, right? (17:32) So if you’re paying so much in fees, think about if you could take that same amount of money that you’re investing in fees and invest it into index funds or whatever the recommendation is.

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JL

(18:37) Well, a big part of it, you know, Jack Bogle once said that performance comes and goes, but fees are forever. (18:44) So those fees are a constant drag on your returns, whether your returns are good or poor. (18:52) So the big advantage that broad-based index funds have is that they are low cost.

(19:00) And over the years, they become lower and lower cost as Vanguard has driven down the cost. (19:04) It’s almost negligible at this point. (19:07) And that matters.

(19:08) It matters over time a lot. (19:10) So you think, think of it this way, if you’re paying 1% to a management company, for instance, that sounds like nothing. (19:18) That sounds, you know, especially if the market’s going up 10, 12%, you know, who cares if I’m paying 1%.

(19:23) But if you turn around and say, well, let’s look at something like the 4% rule about withdrawals, which suggests that on any given portfolio, you can pull 4% a year and reasonably expect the portfolio to last. (19:39) Well, if you’re paying 1% and you’re pulling 4% to live on, you’re now paying 25% of your annual income from your portfolio into management. (19:54) That makes sense, right?

(19:56) So if you’re following that, so it’s compounded over time, just a stunning drag on your returns. (20:05) And it doesn’t really get you anything other than probably substandard returns over time, because again, the unmanaged index is going to outperform. (20:16) So you’re paying more for less.

(20:19) I’m in favor of paying less for more.

Melissa

(20:24) Yeah, absolutely. (20:25) So is there something that you, you know, what do you, what should investors ignore completely?

JL

(20:32) I think what they should ignore completely is the noise and the noise being what they, what they hear on TV. (20:38) This is a long-term game. (20:41) If you’re going to be a successful investor, you need to be in it for the long-term.

(20:45) You need to understand that market corrections, bear markets, crashes are a perfectly normal part of the process. (20:54) They are not the end of the world, which is what you would think listening to the media. (20:58) They’re painful, but that’s what you have to endure.

(21:02) That’s why stocks provide the premium returns that they provide is that you’re willing to take on that risk for those long-term returns. (21:12) And risk is probably the wrong word. (21:14) What you’re really taking on is volatility because the stock market is extremely volatile, especially in the short term.

(21:21) It can drop dramatically. (21:24) And again, that’s to be expected, but long-term it relentlessly goes up, which is why I don’t think of it as risk. (21:32) I think of it as enduring the volatility.

Melissa

(21:35) Yeah, I agree. (21:36) I think that’s the beauty of it. (21:39) Now, I love this quote.

(21:41) You said that money isn’t the goal, freedom is. (21:43) I absolutely agree with that, to have the time and freedom to do what you want with your time. (21:50) And so how should people think about the relationship between their wealth and life that they actually want to live?

JL

(21:59) Yeah, that seems to be a surprisingly tricky thing, at least surprisingly for me, because to me, it just seems to be so obvious and simple, but evidently it is something that people struggle with. (22:14) I mean, money is a tool. (22:16) It’s not the objective in and of itself.

(22:22) Money is what can you buy with your money, is the only utility that money has. (22:29) And of the many, many things that you can buy with your money, one of the things you can buy, and for me, the single most important thing you can buy is your freedom. (22:41) And you buy your freedom by acquiring assets that will slowly but surely provide income that you get without having to trade your time and effort for.

(22:55) So eventually you’re not dependent on your ability to work, or your ability to find somebody who’s willing to pay you to work in order to meet your needs. (23:06) And once you’re at that stage with your investments, you are financially independent and you are free. (23:12) And you are free to continue your work if your work is giving you pleasure and satisfaction, but you’re no longer dependent on it to pay the bills.

(23:20) You’re free to leave that whatever you’re doing, if it’s not providing the psychic benefits that you might want, and go off and do something entirely different. (23:32) So that to me is the most important thing money can buy. (23:36) And that’s why I want to own low cost index funds.

(23:40) Those are the assets of choice in my view.

Melissa

(23:43) Yeah. (23:43) And I love that you mentioned that because I think sometimes we think, and I know I’m guilty of it myself, I have to work to a certain age and then I retire and do the other things that I’m interested in doing. (23:56) But kind of your approach is really designing a lifestyle that fits with you and making sure the money is organized in a fashion to live that lifestyle.

(24:10) So how should individuals define what enough is for them? (24:18) And then what role does that lifestyle design play in wealth building?

JL

(24:26) I’ve alluded to this a little bit earlier. (24:28) There’s a fairly simple formula that I think is useful. (24:32) It’s called the 4% rule.

(24:34) I don’t particularly like the term rule. (24:37) I think of it as more of a guideline. (24:40) And what that says basically is that if you have a portfolio that is invested in low cost index funds, probably a combination of stock funds and maybe a little bit of bond funds, you can expect that fund to last for the long term if you withdraw no more than 4% from it.

(25:03) And that’s considered a very conservative withdrawal rate. (25:07) I’m trying to remember the guy who came up with this. (25:09) Bingen was his last name.

(25:11) And he was specifically looking for withdrawal rate that would endure all kinds of market drops that had happened historically. (25:19) And 4% is what he’s come up with. (25:21) He actually since then, I think, has suggested that it can even be higher.

(25:28) And I mentioned that because a lot of people obsess whether it’s too high. (25:31) But the point is it’s very, very conservative. (25:34) So how does that work in the real world?

(25:37) Well, you can calculate it from two different perspectives. (25:40) Let’s say you have a million dollars invested. (25:44) Well, 4% of a million is $40,000.

(25:46) So what that suggests is that that investment, that portfolio will throw off $40,000 a year that you can spend and expect the portfolio to not only survive, but in most cases, to thrive. (26:02) Now, you can work at it from a different direction. (26:05) Let’s suppose you say, well, I need more than $40,000 a year.

(26:08) I need $100,000 a year to live on. (26:12) You multiply whatever that number is by 25. (26:16) In case of $100,000, now you get $2.5 million. (26:20) And 4% of $2.5 million is $100,000. (26:25) So depending on what your number is, and it’ll be different for everybody else, you can calculate how much you’re going to need to have invested against how much you want to be able to spend. (26:36) And once that number, that annual number is large enough to cover your expenses, and then some little cushion, you can consider yourself financially free.

Melissa

(26:48) That’s a fantastic way to look at that. (26:50) I love that. (26:51) And I think it helps people define what enough is for them by going both directions.

(26:57) And so instead of thinking about it, like you’re saying, 40, if it’s 100, or if it’s 150, or whatever the number is, just do the math. (27:05) So now you’ve been investing for 50 years. (27:09) I’d love to get your perspective on what patterns have you seen in the market and investor behaviors over time?

(27:21) What patterns have you seen?

JL

(27:23) So I think the patterns repeat themselves and the investor behaviors repeat themselves. (27:28) But the most notable thing that I notice is there’s this idea out there amongst investors that they have to wait until there’s a good time to invest. (27:43) And right now we’re at war with Iran, so this is a terrible time to invest.

(27:51) And the truth is that the market pretty much goes up regardless. (27:57) So back in 2015, when I’d only been investing for 40 years, I wrote a blog post called A Stock Return or a Time Machine and the Future Return of Stocks. (28:10) Or Future Return of Stocks and Time Machine, I forget what I had.

(28:14) But the idea behind that post is way back in 1975, I’m sitting around with a group of friends, and somebody says, you know, this guy Jack Bogle just brought out this thing called an index fund. (28:28) And it’s investing in the S&P 500. (28:30) And I wonder how that’s going to do over time.

(28:33) And I perk up in my blog post, I said, well, as a matter of fact, I am just back from the year 2015 in my time machine. (28:41) So I can tell you exactly what’s happened in the last 40 years. (28:46) And then the rest of the blog post recounts the litany of disasters that occurred over that 40-year period, the wars, the recessions, the inflation, the stock market collapse, the, you know, the tech crash in 2000, the debacle in 07, 08, all of these, you know, the wars in Iraq and Afghanistan and all this stuff.

(29:13) And everybody around the campfire says, well, boy, I’m glad you came back and told us that because clearly, you don’t want to be invested in stocks for the next 40 years. (29:22) And of course, the punchline is that stocks on average return 12% a year for those 40 years, a stunning return compounded over time. (29:32) So the market has a saying, stocks climb a wall of worry.

Melissa

(29:38) That’s great.

JL

(29:39) So there’s never a perfect time to invest, and there’s always a perfect time to invest.

Melissa

(29:44) Yeah, as you’re saying that, I think I’m thinking back to kind of during some of that time I was in high school. (29:50) And I remember in the early 2000s, they were saying, take all your money out of the banks because they were moving from 1999 to 2000 and the banks, you know, maybe the money won’t be there. (30:00) And then September 11th happened, and then the real estate crisis happened and kind of all these things.

(30:06) And so, you know, when I was younger, you know, everybody kept telling me to sell everything. (30:11) So I had some money left over. (30:13) And that was a lot of my generation.

(30:15) You know, we were told to sell everything because, you know, the market was going to crash, there’d be nothing left. (30:20) And so I’m curious to get your perspective about what mistakes do investors make repeatedly across generations?

JL

(30:30) Well, the most common one is when the market goes down, they panic and sell. (30:35) And it’s not surprising because if you’re listening to the financial media, when the market goes down, they go crazy. (30:44) I mean, it’s the end of the world.

(30:46) And that’s the advice that is given. (30:49) And it’s terrible advice. (30:51) I mean, I tell people, if you are not going to stay the course when the market goes down, if you’re not going to tie yourself to the mast and endure the storm, you do not want to follow my advice.

(31:03) My advice will leave you bleeding at the side of the road. (31:05) Because if you’re going to buy index funds or any other kind of stock investment and sell when the market goes down, you’re always going to lose money. (31:17) And the only way, and nobody can predict, by the way, when these downturns are going to happen.

(31:23) You see people out there predicting it all the time. (31:26) And every now and again, the market will do something dramatic, either it’ll dramatically go up or dramatically go down, and then they’ll feature somebody. (31:35) This is Melissa, and Melissa predicted that the market was going to drop 30%.

(31:40) And Melissa, if she’s in the business, says, yes, my proprietary, and I saw this coming. (31:49) Well, the problem is Melissa is not going to be able to do it again. (31:52) Melissa got lucky.

(31:54) Because at any given point, there are people predicting anything the market can possibly do. (32:00) I wrote a post tongue-in-cheek saying how to be a stock market guru. (32:05) Well, pick an extreme position, either up or down, and keep predicting it until it comes true.

(32:12) And then tout the fact that you predicted it, and it came true. (32:17) It’s absurd to me that people think that that’s a repeatable thing. (32:22) It’s like, if you were to win the lottery, right?

(32:27) If Melissa were to win the lottery, and by the way, I hope you win. (32:31) But if you were to win it, I hope you’re not silly enough to say, I know how to pick winning lottery numbers now. (32:39) I have this skill.

(32:41) And I hope nobody around you is silly enough to look at you and say, Melissa has this skill. (32:46) She can pick winning lottery numbers. (32:48) No.

(32:49) Reasonable people would say, wow, Melissa got insanely lucky. (32:53) She beat insanely bad odds. (32:56) Well, there you go.

JL

(32:58) I love that you said that, because I think back to a couple of times in my life when I was placing bogus fake bets on horse races and Super Bowl games, and I got lucky. (33:09) But funny, to your point, I was picking my favorite color sporting team, or the favorite animal that was playing in the Super Bowl, or my favorite color horse names. (33:20) And I won.

(33:21) It’s so true that everybody would come to me and say, oh my gosh, who do you want for the Super Bowl? (33:27) Who’s the pick? (33:27) I’m going to place some money on this.

(33:29) And so it’s so true. (33:31) And so what separates successful long-term investors from everybody else?

Melissa

(33:38) Well, I think maybe the biggest thing is humility. (33:41) I mean, the biggest thing is, at least for me, because I spent decades being a stock picker. (33:48) I actually achieved financial independence picking individual stocks.

(33:53) When I hear people arguing against index funds, it’s my own voice in my head I hear, because I made those arguments for way, way too long. (34:03) And the problem is not that stock picking doesn’t work. (34:09) I mean, for a lot of people, it’s disastrous.

(34:12) But for some people, like myself and others, it can work at least moderately well, work well enough to get you some good results. (34:21) The problem is it doesn’t work as well as indexing over time. (34:26) And it takes a whole lot more effort.

(34:29) And it’s frankly more expensive. (34:33) So once that finally got through my thick head, that it didn’t matter that I was reasonably successful as a stock picker, what mattered is I wasn’t doing the optimal thing. (34:45) And that takes a lot of humility, at least it did for me, to recognize that there was a better way than relying on my own skill, which again, had been fairly good.

(34:56) And that better way simply said, no, it doesn’t really take any skill. (35:01) It takes buying the index and sitting back and letting it work for you and not doing something stupid like selling when the market goes down.

JL

(35:10) Yeah, so true. (35:13) And so thinking about the next generation, and one of the things I think about often about teaching them, some of the things I made, mistakes I made in my career, hoping that they don’t have to make the same ones. (35:28) If you were giving advice to someone who’s just starting out in their career, what’s the most important lesson that you want them to remember?

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Melissa

(36:08) Well, so the first thing I would say is if you’re a young person, you are living in a in an amazing point in history. (36:15) I mean, never has the world been wealthier. (36:18) Never has there been more opportunity.

(36:22) Never has there been more information available. (36:24) When I started out, there was nothing. (36:28) I mean, the only information as limited as was was this idea of, oh, you got to trade stocks, you trade, you buy, you sell, you trade, you buy, you sell.

(36:36) You know, Jack Bogle had just begun putting out his work and as I said, it was widely vilified. (36:43) So it took me a decade before I was even aware of Jack Bogle and index funds and then much longer to embrace them. (36:50) There were no books candidly like my own out there.

(36:53) There were no conversations. (36:56) Well, first of all, there was no internet to have these conversations, but there are no conversations like the one you and I are having out there. (37:03) Right now there’s all this information available and one of the things that young people should appreciate that I wish somebody had told me when I was young is how powerful compounding is and if you start young and every now and again, I’m invited to talk to college students and I love doing it because first of all, they’re incredibly bright.

(37:24) They ask incredible questions and they are starting so early. (37:28) You know, they’re interested in this stuff so early and my daughter is a pretty good example. (37:33) She’s about to turn 34 and she quit her corporate gig two years ago.

(37:39) She achieved her own financial independence. (37:43) You know, that’s the power of doing this stuff and the power of compounding, but sometimes, you know, when you first begin, it just doesn’t feel like much is happening. (37:53) It’s the analogy I use.

(37:55) It’s like going to the gym. (37:56) You know, you first start out going to the gym and you just don’t feel like you’re that much stronger or that much leaner, you know, but over time, that’s, you know, small steps over time are what make a difference and starting early is, that’s just brilliant.

Melissa

(38:16) So how early should people start investing? (38:19) How early is early?

JL

(38:21) Well, what I would suggest is if you have a child, I would encourage them to work, first of all, to do something that makes money as young an age as possible. (38:31) I loved working and I think it was very influential in how I developed and then, again, speaking to the time we live in, there’s an opportunity that didn’t exist when I was young called a Roth IRA, right? (38:46) So your kid can have a Roth IRA if they have earned income and the beauty is it doesn’t have to be the income they earn that funds it.

(38:56) So let’s say you have a kid who babysits as you did and maybe they make $1,000 during the course of the year babysitting. (39:04) Well, they can keep their $1,000 and you as the parent can fund an IRA in their name, a Roth IRA, for $1,000 that at the age of 12 will begin, 13, whatever age they’re babysitting, I don’t know what they do at this day and age, begins compounding over decades. (39:26) And you do that every year and it gets them started with the idea of investing to begin with and begins that compounding snowball as early as possible.

(39:38) So you don’t even have to wait until, if the child doesn’t have it, I have to wait until they’re done with school and out in the workplace earning their own paycheck and doing it on their own. (39:49) You can start them on that path as a parent.

Melissa

(39:53) I love that. (39:54) Now, so going back to your example about a child getting a job. (40:00) So let’s say, you know, 18 year old kid gets a job, 16 year old kid gets a job.

(40:05) What percentage of income do you recommend that they save?

JL

(40:10) Well, it sort of depends on the situation they’re in. (40:15) So our daughter, for instance, and I think again, I would, well, what we did, maybe let me talk about it from that point of view. (40:24) What we did is this Roth IRA thing with our daughter.

(40:27) So we encouraged our daughter to start working early. (40:30) She started babysitting at, I forget what age, but 12 or something. (40:35) And we started funding a Roth IRA based on however much income she had until she got to the limit.

(40:42) When she went off to college, the deal we had with her is that we would pay for all the essentials around college, room, board, tuition, books, that kind of thing, anything extra she had to pay for. (40:57) So if she wanted to buy clothes, if she wanted to go out to dinner with her friends, you know, that kind of stuff, that’s what she spent her money on. (41:06) And I wasn’t terribly worried about her saving her teenage earnings money, other than introducing her to the concept of it and showing her that she had an account that was growing.

(41:20) But then of course, you know, once you’re out in the real work world, then you have to, if you want to be financially independent, you have to dedicate a substantial amount of your income to buying what’s most important to you. (41:36) And if like me, financial independence is most important to you, then that’s going to be a very large percentage. (41:42) Because why would you not spend your money on the thing most important to you?

Melissa

(41:48) Yeah, well said. (41:49) I think it’s so true. (41:51) In teaching your children that young is really, you know, for me, I was just putting it into a savings account, which it was, I mean, it was generating, you know, pennies of interest, but putting it into something that can actually, you know, move the needle is really key, like a Roth IRA.

(42:07) I love that. (42:08) I think that’s a great example.

JL

(42:10) Even a savings account is good. (42:11) That’s what I did as a kid. (42:13) And, you know, I mean, like you say, the interest was pennies, but it was kind of thrilling to me at that very young age that, wait a second, I’m not doing anything and I’m getting money?

(42:25) Even though it was pennies, it’s like, I’m getting money and I don’t have to do anything. (42:30) That’s a very powerful lesson. (42:32) And that’s what your investments do for you, writ small, then writ large.

Melissa

(42:39) And I think the interesting thing, you know, as a mom of four kids, I think it’s interesting when kids understand the value of, you know, minimum wage and what they’re earning versus the cost of things and food. (42:52) And, you know, once they can tie it back together, like, wow, I’m making, you know, $10 an hour and this, you know, Starbucks coffee and pastry is over $10. (43:03) So I’ve worked an hour to have one of these Starbucks coffees and a pastry.

(43:08) It starts to compute for them and they start to realize, you know, also debt and, you know, okay, it costs me, you know, $10 and 50 cents, but I only have $10. (43:19) So now I owe you 50 cents, mom. (43:21) So how do you think young professionals, or maybe how should young professionals start thinking about that?

Speaker 1

(43:29) Well, first of all, I mean, debt is a ball and chain dragging you down if you’re trying to even have a successful life of any kind. (43:40) I mean, debt is to be avoided at all costs, in my opinion. (43:46) Maybe some point in the future, if you’re going to buy a house, which is not an investment, by the way, then you’re going to take on a mortgage.

(43:54) But short of that, I mean, I’ve never had a car payment. (43:57) So I am highly opposed to debt. (44:00) And it’s like being covered with leeches, right?

(44:03) With blood sucking leeches. (44:05) Why would anybody be okay with that? (44:08) And if you have debt, you know, you need to take out your sharpest knife and start scraping those little blood suckers off.

(44:16) So lesson one for my daughter, at least, was we never go into debt. (44:23) If you have a credit card, and credit cards are amazing tools, and we have them, we use them, but never once have I carried a balance and paid interest on them. (44:33) Credit cards to me are akin to chainsaws.

(44:36) I put myself through school taking down diseased elm trees. (44:40) So I worked with a chainsaw a lot. (44:42) Chainsaws are amazingly effective tools, stunningly dangerous, especially in those days.

(44:49) I guess now they have some safety equipment attached to them. (44:51) But in those days, they didn’t. (44:53) Stunningly dangerous tools.

(44:55) I mean, I’m the only person I know who’s routinely used a chainsaw to make their living who doesn’t have a scar from the thing. (45:03) And that’s because I never stopped being afraid of it. (45:05) And maybe I’m one of the few people who’s never carried credit card debt, because I never stopped being afraid of how dangerous that tool was, even though I use both tools routinely.

JL

(45:19) Yeah, and I agree. (45:20) I think it’s something to understand. (45:22) And I think about back to kind of my days in college on how many of my peers signed up for credit cards, but didn’t understand how interest worked, and didn’t understand how they could spend $1,000, and the minimum payment was $30 for a period of time.

(45:40) And so they graduated in debt and way behind. (45:43) And so to your point, that getting rid of it as fast as possible is really key for long-term financial success.

Melissa

(45:52) I remember my first credit card. (45:54) So back in those days, credit card companies didn’t send invitations to college students like they do now. (46:02) So I didn’t get my first credit card until I was graduated and working.

(46:08) And I got it, and I think I bought $300,000 worth of stuff on it, and the bill came. (46:16) And I opened up the bill, and there’s the $328.93 or whatever it was that I owed them. (46:25) And there was this little box, or this actually fairly large box, that said minimum payment, $10.50, or something along those lines. (46:33) And fortunately, my older sister was in the room when I’m looking at this, and I said, this is amazing. (46:40) I got to spend over $300, and I only have to give them $10? (46:44) I mean, this is great.

(46:47) And then my sister pointed out the interest rate, which was like 18% or something. (46:54) And she says, yeah, you only have to give them $10, but then they’re going to charge you 18% against the amount that you don’t pay. (47:01) And I looked at that, and I said, you got to be kidding.

(47:04) Do they think I’m stupid? (47:05) And she said, yeah, as a matter of fact, they do. (47:08) That’s exactly what they think.

(47:09) They are thinking, they are hoping that you’re stupid.

JL

(47:13) Yeah, so smart.

Melissa

(47:15) And I would have been stupid enough to do that if she hadn’t been there to guide me a little bit.

JL

(47:19) Yeah, it’s confusing, and it’s not really educational. (47:21) I know in my case, it was really cool. (47:24) They were giving away some free swag if I signed up for a credit card.

(47:27) I’m like, oh, this is so easy. (47:29) I can sign up for this credit card and get this really cool swag, so I did it. (47:32) And similar to you, I had a mentor that was teaching me how to manage money correctly, and it also helped that I worked for a bank, and I understood how money worked.

(47:43) And it’s funny enough, I think back to my days as a teller, I’d saw people every day all the time. (47:50) I saw what they had in their bank account. (47:52) I’d saw they’d come in, they’d make deposits, the way they dress, the way they looked, the way they acted.

(47:58) And what I found and what I learned, it was really solidified in my mind young, was oftentimes the people that looked like they had the most amount of money and they were the most well put together were often the ones that were begging me to reverse their overdraft charges. (48:15) And the ones that were diligent in managing their money and they would come in and they understand addition and subtraction were the ones that had the most. (48:23) I’ll never forget a man that came to see me every Friday and he had come into the bank with flip-flops on all the time, super casual, but he had been retired for 40 years of his life, but he kept the same habits.

(48:38) Every Friday he’d go to the bank, he’d make his deposits. (48:41) And he had a really good kind of what we’ve been talking about today. (48:46) We live in a world that rewards complexity.

(48:51) And what we’re talking about here today is really simple, powerful financial strategies to move the needle. (48:58) And so spend less than you earn, invest consistently, stay patient, don’t freak out when the market changes. (49:07) And over time, that simple path can lead to some amazing…

(49:12) Yeah.

Melissa

(49:14) Those are the three keys, avoid debt, spend less than you earn and invest the surplus. (49:21) You do that and you wind up rich and rich in more than just money, by the way.

JL

(49:26) Yes. (49:27) And I love that you mentioned that. (49:28) I think freedom of your time and to wake up and do the things you want.

(49:33) And so I want to thank you so much for being here today and sharing your stories and your knowledge. (49:39) If you enjoyed this episode of the Executive Connect, make sure to subscribe and share it with someone who’s thinking seriously about building long-term wealth. (49:47) For more conversations on investing leadership and to design a life that works for you, visit us on YouTube or any of your other podcast listening spots.

(49:58) Thank you so much for being here today, JL. (50:01) That’s the Executive Connect podcast.