Three Investment Principles From People Much Smarter And Successful Than I Am

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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Gary Leff, very simple and very easy logic on this one. I would not fully agree, but at least partly agree. These include (1) To your number 1 adage of “Save Half Your Raises”, I would amend it to “Save Half Your Raises AND Half Your Bonuses”. That way, as you note, you are still getting a raise and a bonus, but half of it gets saved/invested as if it never existed. And it “doesn’t exist” until many, many years later when it has grown and compounded and is now worth a fortune. (2) To your number 2 adage of “Don’t Invest in Individual Investments”, I generally agree that low cost mutual funds by Vanguard and a few other firms (Fidelity has some, Schwab has some), I feel that a carefully selected individual stock that you feel will grow and grow and grow and intend to hold for a long time, well, that can be a sweet, sweet deal. For example, years and years ago, I bought Warren Buffet’s famed Berkshire Hathaway (the expensive A-class shares – own two of them). They have tripled in price, and just keep going up. And it is even sweeter when the stocks pay a dividend. So this adage has exceptions that a careful investor can profit nicely from. And I have a different number 3 than you (because your number 3 is really a form of your number 2). And that one is (3) “Don’t Follow The Herd “. Stay true to your philosophy for investing, and stick with it. Yes, I have missed some “high flyers”. But mostly I’ve missed the hundreds of now defunct companies that were touted as “the next great thing”.

    Thanks again, Gary.


  2. For stocks all you need is VTI and VXUS in a 60/40 ratio. (Or the mutual fund equivalents.)

    For bonds all you need is BND and BNDW in a 70/30 ratio. Keep your bonds in a tax advantaged account such as an IRA or 401k.

    Everything else is useless noise. Four simple funds for a .08 ER will do better than 99.99% of everyone else.

  3. In the end, it doesn’t matter. You will wind up being the richest man in the graveyard.
    The one thing I’ve noticed about people with tons of money, is that they always want more.

  4. I’d also consider adding the saying if you’ve won the game stop playing. Your website has been very successful for the past decade. If you have, say, 5 million+ maybe move half to move conservative investments. You might not need to shoot so high to fly private every flight and risk losing what you have.
    When I started investing in my 20s (now in my 40s) I was influenced by Benjamin Graham’s saying to have less than 25% bonds or more than 75% so unfortunately has 25% bonds (and missed out on some of the returns) I agree that starting out for growth (and assuming no panic selling) 100% stocks are best but maybe not needed once you’re made enough.

  5. You’ll get no shortage of advice on this topic. But then your topics are always very honed for clicks.

  6. Only point I differ on is with respect to individual stocks. If you don’t have the knowledge, time or experience to evaluate stocks you he. By all means go w mutual funds or ETFs. However you give up the opportunity for outsized gains. Also you can use stop loss orders to limit downside (as you can w ETFs).

    Personally I have been investing over 40 years and am very happy w my results. While I have a few mutual funds I primarily invest in individual stocks (both long and short). I also trade options (both buy and sell) plus am into investments like commodities, currencies, crypto and real estate. In addition I have a sizable muni bond portfolio.

    It is all about your interest, knowledge and risk tolerance. What I do doesn’t work for many but it does for me and I have done much better than if I had simply put the money in mutual funds.

  7. Good advice; my wife knew a man who did a lot of day trading and thought he was making lots of money…until the taxes were due! And I’ll add beyond just “saving and investing” is that using a 401(k) or IRA from the start of one’s career can help tremendously over time. When I was teaching in a classroom–I’ve done it online at a U. for several years now) I always explained compound interest to my students. It was amazing how many of them didn’t understand the concept, and either had terrible personal loan rates or didn’t have a 401 or IRA. So if you have kids or friends starting work make sure they “get it.” Beyond that I would just say: Stay the course! Many people seem to panic when a piece of bad news comes along and sell, sell, sell, just like everyone else. Then when things get better they start buying, just like everyone else. This is ridiculous; you don’t sell low and buy high! Find good equities (or well run/lower fee mutual funds) and stick with them over the long haul. Markets will have dips. They also come back.

  8. Well, I agree that buying low cost funds is an excellent option. But buying individual securities is just as good if only one rule is followed doing good but not complicated technical analysis: Buy Low, Sell High. Most all my long term buys have done well (some really well as my grandmother bought them). Short term buy and sell is ok too in a traditional IRA account as there is no short term capital gain taxed as ordinary income.

  9. Tax loss harvesting is overrated. You get tax break now (if you have gains or are only doing 3k) but you drop your basis and pay the taxes later. If you reinvest your tax savings and take the gain when you are in a lower bracket then yes it is smart and the gains will compound. But here’s a question for all these tax loss harvesters — are you also doing roth conversions of tax advantaged money? Half or more answer “huh”? It’s the same bet you are making.

    Most people who do tax loss harvesting don’t even understand that they are dropping their basis. Somehow it is out there in the blogosphere that it is free money.

    It can definitely make sense but so many people don’t actually know what it is that they are even doing, let alone making educated guesses about future tax rates.

  10. @Larry – the best way to do tax loss harvesting is to sell a position and immediately buy a very similar, but not identical, position (e.g., sell Chevron and buy another oil company). That way you get the loss to lower taxable base but still likely participate in any upside.

  11. Some newer investors have seen some strong bull years. They think they are wizards of wall street. Recently I have seen some claims about stocks they are buying for a forever hold. They may have heard that Buffett and some others have done that, or they merely think the best stocks of today, typically tech stuff like FB, Apple, Netflix, Google, Amazon will run forever. But they don’t understand even Buffett doesn’t hold everything forever. Stocks like Coke-yes. The cocky nature with the crypto stuff when it started as a game and fun, will be tears and misery when the bubble pops. One thing I have always learned, the big guns with huge money usually handle the losses, but the little dudes are the bagholders in those blowouts. The investors who can least afford the losses, suffer the most. Simple index funds as the way I do it. Because most investors over time wont even meet the index averages, Ill be way ahead. And as far as the weird comment, the richest guy in the graveyard I dont get that sort of thinking in relation to this.

  12. @Bobby Lash – am sharing something personal and explicitly not holding myself out as any sort of expert on the topic, what’s your beef?

    “I am not a professional investor…I know very little…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.”

  13. Gary,

    Loss harvesting kind of requires that one have numerous diversified individual investments rather than funds, whether mutual funds or index funds, that spread risk, but over time make money.

    A diversified portfolio may have 30 stocks. Its obviously best if none has a loss, but that never happens. Loss harvesting takes a small bite out of the sting of having invested in the occasional loser.

  14. Not investing in individual stocks does take away potential for outsized returns. Apple was one of the biggest companies in the U.S. 10 years ago and in an investment in it would have yielded multiples of an S&P index fund. You can say the same thing about Microsoft. These weren’t some obscure high risk companies. These were mega large cap 10 years ago and are much more mega today. An investment in Tesla any time last year (at the high) would be a 46% return today down from the highs a few weeks ago.

    It’s true that the average person will do better investing in VOO/VTI, however, pundits tend to downplay the real possibility that people who are good stock pickers can juice their returns and make multiples over the S&P 500 in the long run. Average means there are people better and worse.

    Using margin and using leveraged ETFs can also boost returns.

  15. Well I had a long brag comment almost finished up but then lost it to iPad irregularities, I’ll just say Hubby and I are very fortunate. Our investment strategies and fees vary from a couple million invested with 1% fees (& loss harvesting) and nearly a million in low fee Federal Thrift Savings Program (not withdrawing until required to). 2 modest pensions and SS for hubby and spousal benefits for me until I’m at max SS age – next year I think – effector a 7-8% growth annually

    Next up to learn how to use charitable donations to minimize taxes on MRD from the IRS & TSP

    Hang in there for retirement. It’s great – especially the past two COVID years.
    Fun to switch from saving mentality to spend baby spend 🙂

  16. 1. I think the best advice is to put the maximum you can into a Roth 401K or Roth IRA. ​If self employed that can go up to over $60K/year. Plus some employer plans allow the you to put in after tax money into a 401K (with a total up to $60K+) with that after tax portion (after you reach the max normal limit for pre or post tax) to do auto rollover into Roth.

    2. As you get older – it is a good idea to buy some top quality individual dividend stocks for additional income. No investments fees when you own the stock outright.

  17. Seems like everyone ^^ has the same basic idea: invest. Prepare for retirement. Don’t live beyond your means. All good stuff.

  18. I’ve worked 25 years at startup tech companies hoping for one to pay off. None did. So now I’m at a large company with good benefits and looking at another 20+ years of work. But I’m happy and have had a really fun career so far.

    I will say conservative stock mutual funds have paid off extremely well for me the past decade. And with that statement you can tell that I’m a small potato…

  19. @AC — I get it. Sell SPY at a loss, buy VTI or VOO. Keep the upside and take the loss, if you have gains or up to $3k against ordinary income.

    The problem is that you now have a lower basis in your VTI than you had in SPY, and so you get taxed on more gain when you sell your replacement asset (in this case VTI).

    Example: Buy 100 SPY for $10,000. Sell it at $8,000. Buy $8,000 VTI. Yes, you just created a $2,000 loss. Congratulations. But now your basis in VTI is $8,000. Instead of owning SPY with a $10,000 basis. You’ll pay tax if VTI goes up. There’s no free lunch.

    If you’re making bets about your future tax rates and reinvesting your tax savings, then, sure, you may eek out an advantage by tax loss harvesting. But most people don’t even understand what they are doing.

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