JL Collins’ Simple Path to Wealth Portfolio

JL Collins’ Simple Path to Wealth Portfolio – ETFs, Return, Performance, Risk Analysis

The Simple Path to Wealth Portfolio by JL Collins is a “lazy” index diversified portfolio that allocates assets across two asset classes: stocks and bonds. These two asset classes are divided into two categories: U.S. stocks and U.S. bonds. Thus, this is an all-American portfolio.

The Simple Path to Wealth Portfolio strategy can be implemented using two different index ETFs that are well diversified and have good historical performance. There is no need to pick individual stocks and bonds or spend much time and effort on this.

In this article, we will describe in detail the structure of The Simple Path to Wealth Portfolio and backtest it on historical price data. Looking ahead, we can say that according to our backtests over the past 16 years, The Simple Path to Wealth Portfolio has the following performance stats:

  • Compound annual return (CAR): 7.95%;
  • Maximum drawdown (MDD): -42.49%;
  • CAR/MDD ratio: 0.19;
  • Standard deviation: 15.92%;
  • Sharpe ratio (with a risk-free rate of 3%): 0.31.

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Who Is JL Collins

JL Collins is the author of the international bestseller “The Easy Way to Wealth: Your Roadmap to Financial Freedom and a Rich, Free Life.” In the financial independence community, he was called the “Godfather of FI.” FI is an abbreviation for Financial Independence.

JL Collins launched his eponymous blog jlcollinsnh.com in June 2011 and is the founder of the legendary financial independence retreat Chautauqua. His Talk at Google has over 1.4 million views and has appeared on dozens of popular financial shows and podcasts.

His first job was selling flyswatters door-to-door and collecting empty soda bottles from the side of the road for a 2-cent deposit (at the age of eight). He most recently worked as a talk show host and magazine publisher. His work has taken him to most states in the US, as well as Canada, Germany, and England. He also traveled extensively in his time. He has been married to his wife Jane for 41 years.

What Is The Simple Path to Wealth Portfolio?

The Simple Path to Wealth Portfolio consists of the two following asset categories with their respective total weights:

Asset categoryWeight in the portfolio
U.S. Stocks75.00%
U.S. Bonds25.00%

Stocks In The Simple Path to Wealth Portfolio

Stocks are equity securities representing an ownership share in a corporation and giving the right to receive dividends if paid. Stocks are risky. If you a company goes bankrupt, shareholders lose their equity.

However, historically, stocks have shown the highest returns, outperforming all other asset classes, such as bonds, gold, and real estate.

Adding stocks to a portfolio increases its overall return but makes the portfolio more volatile and more vulnerable to drawdowns during times of crisis. Stocks have historically shown the highest price variance of all asset classes.

The Simple Path to Wealth Portfolio includes the following types of stocks:

  • U.S Stocks – U.S. large-cap growth and value stocks that virtually replicate the benchmark S&P 500 stock index.

For stocks, we have picked these ETFs, which are well diversified, have high liquidity and a long performance history:

Portfolio SectorETF NameETF Ticker
U.S StocksSPDR S&P 500 ETF TrustSPY
U.S Stocks (alternative)Vanguard Total Stock Market ETFVTI

Instead of SPY, you can use VTI as an alternative ETF.

Bonds In The Simple Path to Wealth Portfolio

Bonds are fixed-income debt securities that are less profitable but more reliable than stocks. In case of bankruptcy, bondholders are paid before shareholders.

Adding bonds to a portfolio might reduce its overall return but makes the portfolio less volatile and more resilient to drawdowns during periods of crisis.

Bonds also have a low correlation with stocks, which improves portfolio diversification.

The Simple Path to Wealth Portfolio includes the following types of bonds:

  • U.S. Bonds – wide coverage of US bonds, including treasury, municipal and corporate bonds with all-term maturities.

For bonds, we have picked these ETFs, which are well diversified, have high liquidity, and a long performance history:

Asset categoryETF NameETF Ticker
U.S. BondsVanguard Total Bond Market ETFBND

Backtesting Of The Simple Path to Wealth Portfolio

Let’s backtest The Simple Path to Wealth Portfolio under the following conditions:

  • A simple “Buy & hold” strategy is used;
  • Annual rebalancing takes place on January 1 of each year;
  • Described ETFs with the appropriate weights are picked;
  • Historical quotes are adjusted for dividends;
  • The backtesting interval from 2007 to 2023.

Portfolio equity curve:

JL Collins' The Simple Path to Wealth Portfolio

Portfolio underwater curve (drawdowns, i.e., decline in value from a relative peak value to a relative trough):

The Simple Path to Wealth Portfolio risk, returns, and performance

Portfolio monthly and annual returns:

YearJanFebMarAprMayJunJulAugSepOctNovDecYr%
20071.3%-1.5%0.9%3.4%2.4%-1.2%-2.2%1.3%3.1%1.3%-2.5%-0.6%5.5%
2008-4.2%-1.9%-0.5%3.4%0.9%-6.2%-0.6%1.4%-7.0%-12.6%-3.4%2.4%-25.9%
2009-7.0%-8.0%6.2%7.3%4.5%0.1%5.9%3.1%2.9%-1.4%5.0%1.2%20.1%
2010-2.3%2.4%4.5%1.4%-5.7%-3.4%5.2%-2.9%6.5%2.9%-0.2%4.7%12.9%
20111.8%2.7%-0.0%2.5%-0.6%-1.4%-1.1%-3.7%-4.9%7.9%-0.3%1.1%3.4%
20123.6%3.3%2.3%-0.3%-4.4%3.1%1.2%1.9%2.0%-1.4%0.4%0.5%12.7%
20133.7%1.1%2.9%1.7%1.4%-1.4%4.1%-2.5%2.7%3.8%2.3%1.9%23.6%
2014-2.3%3.5%0.6%0.7%2.0%1.6%-1.1%3.3%-1.2%2.0%2.3%-0.2%11.5%
2015-1.6%3.8%-1.0%0.7%0.8%-1.8%1.9%-4.7%-1.7%6.3%0.2%-1.3%1.1%
2016-3.4%0.2%5.2%0.4%1.3%0.8%2.9%0.0%0.0%-1.5%2.1%1.6%9.7%
20171.4%3.1%0.1%0.9%1.2%0.5%1.7%0.5%1.4%1.8%2.3%1.1%17.3%
20183.9%-3.0%-1.9%0.2%2.0%0.5%2.8%2.6%0.3%-5.5%1.6%-6.2%-3.4%
20196.3%2.4%1.8%3.1%-4.5%5.6%1.2%-0.7%1.4%1.8%2.8%2.2%25.6%
20200.5%-5.5%-9.5%9.7%3.6%1.5%4.7%4.9%-2.8%-2.0%8.4%2.9%15.7%
2021-1.0%1.7%3.1%4.3%0.5%1.9%2.2%2.3%-3.9%5.5%-0.6%3.6%21.1%
2022-4.4%-2.5%2.1%-7.6%0.4%-6.5%7.3%-3.7%-7.9%5.6%5.1%-4.5%-16.8%
20235.6%-2.6%3.5%1.4%0.1%4.2%N/AN/AN/AN/AN/AN/A12.5%

Portfolio performance statistics compared to benchmark S&P 500 Total Return index:

Statistical MetricPortfolioS&P 500 TR
Annual Return %7.95%9.24%
Exposure %99.58%100.00%
Risk Adjusted Return %7.98%8.95%
Max. drawdown-42.49%-55.19%
CAR/MaxDD0.190.17
Standard Deviation15.92%22.64%
Sharpe Ratio (3% risk-free)0.310.26

Conclusion On The Simple Path to Wealth Portfolio

  • The Simple Path to Wealth Portfolio lags the S&P 500 TR index in terms of average annual return but outperforms the index in terms of drawdowns;
  • If you want to get the highest possible return, regardless of the level of drawdowns, then allocate your funds 100% in stocks. You can mix different stock ETFs; for example, allocate 75% of the funds to US stocks and the remaining 25% to international stocks;
  • This portfolio is a good example of how over-diversification does not lead to better results. This simple 2 ETF portfolio performs better than many complex 5-10 ETF portfolios.
  • The SPY itself is properly diversified, consisting of 500 different stocks. That’s more than enough for proper diversification.
  • Be disciplined and strictly follow the asset allocation rules that you have chosen for yourself. There are many “lazy” portfolio strategies that you can pick. Many of them are described and backtested.

FAQ:

What is The Simple Path to Wealth Portfolio by JL Collins?

The Simple Path to Wealth Portfolio is a “lazy” index diversified portfolio created by JL Collins. It allocates assets across U.S. stocks and bonds, offering a straightforward investment strategy without the need to pick individual stocks and bonds.

How is The Simple Path to Wealth Portfolio structured in terms of asset allocation?

The portfolio consists of two main asset categories: U.S. Stocks (75% weight) and U.S. Bonds (25% weight). This allocation is designed to provide a balance between the potentially higher returns of stocks and the stability of bonds.

Who is JL Collins, and why is he known as the “Godfather of FI” in the financial independence community?

JL Collins is the author of the bestseller “The Simple Path to Wealth” and is recognized as the “Godfather of FI” (Financial Independence). He is a prominent figure in the financial independence community, known for his blog, financial independence retreat Chautauqua, and extensive experience in finance.

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