I grew up in a family of stock brokers and lawyers (on my mother’s side – my dad’s side of the family it was car dealers). However I am not a professional investor. I’m an educated layperson which is to say that I know very little. And that’s precisely why I’m sharing this post, because most readers aren’t investment professionals either.
There are basically only three things that I know about investing, and they are pieces of advice I’ve gotten from people who are far, far smarter than I am – and far more successful.
I was prompted to share them by a recent reader comment about the high fees they were presented with when considering investing with a big bank. Someone who charges high fees for their investment management once said the number one way to destroy investment returns is… high fees.
1. Save Half Your Raises
This first piece of advice came from one of Sir John Templeton’s original investment firm partners, and was something he shared with me 23 years ago.
He told me that I should save half of each raise and invest that money. That way the money I’d be setting aside would never feel like I was giving something up. It’s the easiest money to save because you’re still rewarding yourself each time you earn more, but progressively putting more and more money aside.
I wasn’t making very much when I first got this advice and started to think seriously about investing. I had a lot of raises ahead of me, and a lot of opportunities to save progressively more. His point was start early, get in the habit, and increase the amount you’re putting away as you grow your ability to do so.
2. Don’t Bet On Individual Investments
Nineteen years ago a man who is today in the top 30 in the Forbes billionaires list told me – in the context of lecturing me on mistakes I might be making at work – that people a lot smarter than I am spend all of their time trying to get a small edge on the market, and get killed half the time. Since I’m not spending all of my focus on this, what chance do I have?
It was far better to bet on the market as a whole than to pick individual stocks, because while I might get lucky it’s unlikely I’d be systematically lucky over a long period of time.
A few years ago I attended a talk with billionaire founder of AQR Capital, Cliff Asness, where he said someone like me should just “give your money to Jack Bogle.” What he meant was put away money in lowest-cost broad-based mutual funds. (Bogle, who passed away in 2019, was founder of Vanguard.)
3. Fees Will Destroy Your Returns
Asness also said something at the same talk which stuck with me: “there’s no investment strategy so good that it can’t be ruined by high fees.”
Why would you pay more than 5 or 10 basis points for a largely passive fund that’s just giving you exposure to a broad basket of equities?
The more you pay in fees, the less you’ll make over time, and fees compound. The more you pay in fees the more the investment has to outperform the market, which very few investments do consistently over time at all.
So What Do I Actually Do?
For investable cash – money that I don’t anticipate needing in the next 5 or 10 years or frankly even 15 – I am all in equities. There’s nothing that seems as likely to offer as good a return, and the volatility doesn’t bother me. I am basically betting that the world is going to look better in the future than it does today. (If it doesn’t we probably have even bigger problems.)
And I invest in broad-based vehicles that give me exposure to the market as a whole, rather than investing in individual stocks. That way I’ll get the average performance of the market, and I can do this very inexpensively.
There’s really only one ‘twist’ to this strategy, and it’s something you can do yourself on a self-service basis for less but that I do pay higher fees for: tax loss harvesting against my US large cap investments. That means selling stocks when they fall to recognize losses.
I still want my exposure to the market as a whole to be the same, and you can’t just sell a stock and buy it right back or else you can’t claim the losses (wash sale rules, you’d have to wait 30 days) but with large cap equities there are so many different equivalent investment vehicles that give you the same exposure it’s possible to move from one to the other, keep your exposure basically the same, and capture losses along the way that offset the gains you’re earning in the market.
Whether or not this is worth is compared to the fees – see the third rule – ultimately depends on the volume of losses that can be harvested. At 100 basis points in total fees, and a 20% capital gains rate, you’d need to harvest 5% in losses annually just to break even. It was pretty easy to beat that by a lot in 2020 given the market’s volatility, but most years aren’t anything like 2020. If capital gains rates go up, with no other changes in tax law, the value of tax loss harvesting will rise.
Since I am not a professional, I don’t offer this as investment advice. In fact you’re probably better off not doing what I do, because I don’t know what I’m doing. I just have some basic principles I’ve gathered from three people that are far smarter and more successful than I am.