A Paradigm Shift: The Savings Portfolio

I really liked these quotes from Abnormal Returns which cite a blog post from The Zikomo Letter who riffs off my idea of the “savings portfolio”:

The second post at The Zikomo Letter makes a great point about the status of most of us investors, nee savers. The fact is that we aren’t traditional investors in the classic sense, we are in fact savers who should be focusing on generating real, risk-adjusted returns on our savings. The problem is that:

You are not an investor. You are, perhaps, an over-leveraged trader with unacknowledged cognitive biases and poor risk management.

That is okay however. There is much more to life than investing. The point being that we can generate “returns” much more easily on other important aspects of our lives than we ever can in the financial markets. There is a reason that professional money managers have a difficult time adding value over and above the fees they charge. The challenge for many is making this shift towards a more holistic view of their lives, finances included. TZL notes a simple nomenclature change can help:

You are not an investor, you are a saver. And that is good, because you are not very well positioned to be a successful investor, but you are well positioned to be a great saver.

This is so important.  I think this is a paradigm shift in the way people approach their portfolios.  The idea of investing is sold to people to give them the impression they’re actually doing something much sexier than what they probably should be doing.

Investing sounds sexy.  Who wants to save?  Saving is boring, slow, bleh.  But investing is awesome.  It’s high performance, sexy, you know, Warren Buffett does it!  It’s like buying a Ferrari.  It looks sexy, it goes fast and it’s expensive.  A Ferrari is the “investing” equivalent of a hedge fund.  The problem is, you’ve got your kids strapped in the back (maybe even in the trunk if you have a big family) and you probably have no idea whether the driver can actually control the vehicle (because you’re obviously not driving when you hire someone else to take care of your portfolio).

The reality is that you’re not investing in a secondary market.  You’re allocating your savings.  It’s not sexy.  It’s not fast, sleek and it shouldn’t be expensive.  It’s like driving a Honda Accord.  It’s not the Ferrari, but it will get you from point A to point B and it will do it much safer, far less expensively and best of all, you can operate it entirely on your own.  But the investment business doesn’t want you in a Honda Accord.  They want to sell you the Ferrari because, well, it’s more expensive.  9 times out of 10 you should probably leave the Ferrari in the garage and just take the Honda Accord….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Stephen

    Actually ,there is a thrid option albeit it may be beyond the reach of some of the people you are addressing. That is,you can be a saver who uses his savings to both Invest and speculate where the latter really equates to supplying liquidity to the market based upon identifiable market behaviour.
    Professional money managers have difficukty as you say,but that’s for a variety of reasons not least of relates to the fact that it is their job and that in my view places more constraints upon them than it does on the individual. That is, benchamrking;caveats on what they are allowed to be in;sizing and decision making timelags effect upon flexibility of allocation.And so forth. Not every pro will have all these issues,but most have some combination of them.
    Individuals by comparison have a lot of flexibility and that is a huge positive IMO in working market behaviour for return over and above that achievable by pro fund managers.

  • Nils

    Are there Ferrari with backseats?

  • micro2macro

    Yeah but can you get laid saying you drive a Honda Accord?

  • Nils

    You could always lie, you can even buy a Ferrari or Porsche Key on eBay ;). I don’t think working your ass off to pay for an expensive, flashy car is a pretty steep investment for there is no real objective proof that a car like that will actually increase your chances.

    I also doubt the typical gold digger is likely to put out early for a man that can potentially be milked for a lot more if the right strategy is employed…

  • micro2macro

    Ah yes all true, but like investing it’s about probabilities is it not……..

  • Dan

    Very nice Cullen. It’s easier to make money than it is to invest it. And it’s far too easy to lose it! My goal in “saving” is to find the safest way (least volatile way) to find 3% real return on my retirement accounts. I can’t stuff it under a mattress, but it is a different paradigm to say to myself–no, I need 6% nominal, not 7%, etc.

  • http://pragcap Michael Schofield

    Great article. Most can’t/won’t invest the amount of time necessary to be successful as investors.

  • Nils

    Most people lack the capital to be investors.

  • Stephen

    You can if the average fund investor as a knowledge/skill/time involvement base that equates to ‘looks like the back of a bus’.

  • Stephen

    They lack a lot of stuff as well,but capital counts.

  • Johnny Evers

    Investing … saving — sounds like semantics.
    If you put your money in a bank, or buy a Treasury bond — are you saving or are you investing? Probably saving, except you’re losing purchasing power if you do that.
    Most Americans have been driven to ‘investing’ because inflation eats their ‘savings’.

  • http://www.orcamgroup.com Cullen Roche

    Semantics matter. The devil is in the details…

  • Johnny Evers

    Details, please?!
    I guess what you’re saying is that you should ‘invest’ in yourself (job, career, health, spiritual energy, ability to help others) and then ‘save’ the resultant profits.
    The problem is that most people see savings as something that stores value — cash, a house, maybe gold — but those things aren’t necessarily a good store of value, whearas Coca-Cola stock might be.

  • http://www.orcamgroup.com Cullen Roche

    The goal should be protecting vs purchasing power loss and permanent loss. I’d argue that investors in Coke aren’t achieving this. Savers in SP 500 are. Details matter.

  • Stephen

    What would happen if that was actually the majority behaviour? ;)

  • Johnny Evers

    I would say that most people have that goal. … Now John Paulson, Warren Buffet and people in the game — those guys are keeping score. For them, ‘permanant loss’ means they have to go out and round up more money elsewhere. But most Americans want to protect their money so they can spend it later.

    Coca-Cola along with a diversified portfolio of other stocks, bought and held = the S&P 500.
    But it’s interesting that if you say that the S&P 500 is a ‘savings’ vehicle, then the attitude of the Fed toward the stock market must be one of ensuring that the S&P 500 stays above the level of inflation.
    It very well could be that this is already the policy of the Fed. The Fed has failed to protect the purchasing power of the dollar (which is one of its mandates; however, it does appear to be protecting the purchasing power of the S&P 500, with its various policy puts.

  • http://www.orcamgroup.com Cullen Roche

    I disagree. I think most people think they’re investing and end up taking excessive risks creating little cushion against permanent loss.

  • Johnny Evers

    We must move in different circles, then. I probably met with a thousand saver-investors last year, all of them working or middle-class people, and all of them told me, in so many words, ‘Don’t lose this money.’ Yes, they want to grow their money, but nothing is more important than protecting the principal.
    It’s been tough for savers.
    They can’t put their money in the bank, because they lose purchasing power. They put money in their house because they saw it as a hard asset that could not lose value, but some of them have suffered permanant loss there. And now you’re saying that the S&P 500 is a ‘savings’ vehicle that will protect them against permanant loss, which is not their experience.

  • Shane

    Not sure if you knew this, but Harry Browne came up with this concept decades ago. Not exactly a “Paradigm Shift”.

    In the 1980s he helped unveil a “Permanent Portfolio” fund and in 1987 he devised a DIY-type portfolio invested in 25% gold, 25% stocks, 25% treasuries and 25% cash — as a means to protect against inflation and permanent loss.

    His concept was for investors to have a “Permanent Portfolio” for the money they “can’t afford to lose” — and, again, this conservative portfolio was designed to protect that money from inflation and permanent loss. If desired, the investor could also have a self-customized “Variable Portfolio” where high risk was taken. The Variable Portfolio could be anything you wanted it to be.

    So an average investor might be 50% PP and 50% VP. Or, perhaps, 90% PP and 10% VP. Or even 100% PP and no Variable Portfolio.

    He devised this concept decades ago. Let’s give credit where credit is due!

  • http://www.orcamgroup.com Cullen Roche

    I am not a PP advocate. And no, Harry Browne did not describe the same thing. In fact, in the book that made his approach famous he uses the terms “speculating” and “investing”. From a technical sense, Browne is wrong and that technicality is an important point here. The PP is more like Dalio’s All Weather portfolio. I don’t think that approach is wise going forward. See my post on asset class returns for a taste of my thinking there…

    Also, the approach the PP uses is totally different from what I use. I would never put 50% of my money in a portfolio that cannot protect against purchasing power loss (cash) and permanent loss (gold).

    I agree with many of Browne’s more basic 17 rules, but I am probably closer to Bogle when it comes to this sort of stuff. But my portfolio construction would probably not be advocated by either of them….I am really closer to a combo of Dalio’s all weather and his pure alpha….

  • Lucas

    I would love to be able to drive my Honda Accord, but the owner’s manual is for an airplane. Details please? Where exactly should a saver (not an investor) put cash? I absolutely want to protect against both loss of purchasing power and permanent loss. Where would that be? I must do it myself anyway because I do not yet have the minimum most advisers require. Data on the median net worth of Americans indicates that nearly half of us are stuck with the same airplane. We have to pilot it ourselves. No wonder so many of us crash and burn.

    No wonder so many of us simply put our cash in the bank, knowing full well we are suffering loss of purchase power. With today’s interest rates, the bank is the equivalent of the Biblical servant who buried his master’s money in the ground.

  • http://www.orcamgroup.com Cullen Roche

    This is basically what the whole portfolio review process is designed to achieve. It’s one of the reasons I started Orcam. I wanted to help more people get “teed up” with a portfolio they can control and achieve those goals with and not have to outsource investment management to guys like me permanently. Yet feel confident and empowered enough to take control….


  • Nils

    Now I’m confused, how would one become an investor in Coke without a time machine?

  • http://www.orcamgroup.com Cullen Roche

    I wasn’t very clear. Investors in Coke made a lot of money by funding the company. Savers also made money, but not as much as the original investors (many of whom sold their stakes to savers on the secondary market). Problem is, for every Coke there are 20 failed Cokes (and investors who lose money). So, if you want to build an efficient market frontier you’d have to put private equity way out on the top right. Buying individual stocks in an undiversified savings portfolio is further down to the left. And buying an index fund is a bit further down to the left. The kicker being that the index fund protects from the risk of permanent loss better than the other two options….I am not saying that investing is bad. I am just pointing out that they’re two different things. Most of us are not real investors in the pure sense of the word.

  • Tom Brown

    I couldn’t agree more. That’s why John Bogle’s approach carried me through several decades of savings quite nicely. I’ve only recently deviated because:

    1) I’m not sure the efficient markets hypothesis (EMH) is as true as it used to be back when America wasn’t dominated by the financial sector (i.e. back when industry and building things trumped financials and get rich quick financial manipulations). Too many speculators, crony capitalists with too much influence on lawmakers and regulators, and outright criminals involved in this business… at the heads of some of the biggest companies. We’ve effectively decriminalized fraud for white collar criminals and deregulated the big financial institutions… but only for the really big players.

    2) Out political system can be sabotaged by a handful of lunatic fringe lawmakers who seem determined to cause real damage. Do I think it will happen? Probably at the last minute their influence will be overcome, but I just don’t have the stomach for it anymore.

  • Android

    But according to MR’s S = I + (S-I), are not savers the same as investors and investors the same as savers? Most people realize savings allow for investing but, according to MR, investing also allows for saving. Regardless, the investors and savers lie on the same line but opposite poles. The difference is the measure of risk. Savers have minimal risk and investors generally having a much larger risk (i.e. think borrowing money to invest in a business).

  • Nils

    Why would you formulate your goal like that? To me it seems a bit too concrete. Saving is a trade off, you reduce your spending (which might affect your quality of life) now to have something of greater value later. What is it that you seek to achieve? Retire early? Retire comfortably?

  • jt26

    When starting out just stick with a 35/65 equity/bond index fund or ETF split. Invest regularly. If you have a short time horizon (<3 years), e.g. to save for a house, just go 100% bonds. Spend a few years to learn about investing, but not too much time, as your career is still your biggest money maker. There's no rush to learn to be a better investor. You're better off trying to get a 10% raise, esp. early in your career, then trying to get a 5% investment edge on a small investment.

  • http://www.orcamgroup.com Cullen Roche

    The point is to get precise about the definitions. Saving is income unspent. Investment is purchases not consumed for future production. When you buy shares of stock on a secondary market you’re allocating your saving (your unspent income). When you’re investing you’re funding future production. When I funded my company last year I made an investment. When I buy shares of XYZ I allocate my savings. You make the key distinction which is crucial. When I funded my new company I was taking substantially more risk than I was by allocating my savings into a portfolio like the S&P 500 of established companies. That’s the crucial distinction here. Most people think they’re investors when they’re actually savers and they end up misunderstanding their risk levels in their portfolio or just designing the portfolio completely wrong.

  • Shane

    Please. You’ve taken Browne’s “money you can’t afford to lose” concept and rebranded it.

    For the record, here is how Harry Browne defined investing/speculating:

    “Investing is an attempt to earn a profit while protecting what you have — protecting it from depreciation, confiscation, inflation, or anything else that might rob its value.

    Speculation is an attempt to outguess the market — to win big by being in the right market at the right time.

    If you put most or all of your money into blue-chip stocks before October 19, 1987, you probably thought you were investing. But it should be obvious now that you’re speculating whenever you bet everything you have on one market, or your ability to forsee the market will turn around, on the idea that you know more than other investors. You’re speculating — no matter how strongly someone assures you that you’re “investing” conservatively.

    There’s nothing wrong with speculating — provided you do it only with money you can afford to lose.”

    Source: Harry Browne, Why The Best-Laid Investment Plans Usually Go Wrong, Page 548.

  • Shane

    With respect to gold, here is what Harry Browne had to say about the asset:

    “Most financial assets are obligations due to you. A bond, bank account, or Treasury bill is someone’s promise to pay you a number of dollars. A stock is a piece of paper that entitles you to a share of a company’s assets and profits — if any.

    And unless you maintain a private army, even real estate is a paper promise — since its value depends on the government’s restraint in respecting your deed, and on the performance of its promise to protect your property.

    Gold is the only investment that stands on its own. It is real money — portable, independent, divisible, durable, and recognizable — and so it survives when everything else fails. Welcome in far more places and circumstances than your American Express card, it is the most reliable source of financial security.

    That doesn’t mean that gold will always have today’s value. But it will always have some value — no matter what happens to governments or currencies.

    It is your portfolio’s asset of last resort.”

    Source: Harry Browne, Why The Best-Laid Investment Plans Usually Go Wrong, Page 321

  • http://www.orcamgroup.com Cullen Roche

    No, Harry Browne’s definitions are wrong. And it results in an ENTIRELY different portfolio structure than what I actually do. Investing is absolutely not “an attempt to earn a profit while protecting what you have”. Investing is purchases not consumed for future production. Saving is income unspent. I would NEVER recommend a portfolio that is 50% cash and gold so I have no idea how anyone could say I am “rebranding” Harry Browne’s ideas when the conclusions are COMPLETELY different. I mean, the portfolios are night and day. It’s insulting that someone would essentially accuse me of stealing an idea when I don’t even come close to designing portfolios like Harry Browne’s.

    I get this all the time for some reason even though my definitions are completely different and my conclusions are radically different from the PP. My portfolio doesn’t resemble the PP even remotely. It MIGHT resemble Dalio’s All Weather PLUS Pure Alpha portfolio a bit, but even that is very different.

  • http://www.orcamgroup.com Cullen Roche

    “That doesn’t mean that gold will always have today’s value. But it will always have some value — no matter what happens to governments or currencies.”

    I totally disagree with this idea which is why I would never recommend a 25% allocation to gold (despite your claims that I have ripped off the PP idea). Gold is a commodity with an embedded faith put that is due to the misguided belief that gold is a currency. This faith put embeds a premium in its price that is largely irrational, but very real. There is absolutely positively no guarantee that that faith put will always exist and that gold will continue to outperform the real negative returns of other commodities. If the faith put evaporates gold will perform just as poorly as other commodities tend to perform over the long-term. When this happens (and it will – whether in my lifetime or the next) the PP will get blown up and it will take down all the johnny come latelys with it.

    The Permanent Portfolio is the new hot thing. It’s the latest fly by gimmicky portfolio that has benefited primarily due to the huge rallies in bonds and gold in recent years. Anyone who thinks this approach is “fail safe” going forward is wrong. That’s why I would never recommend something like it.

  • Shane

    You’ve misunderstood me. I didn’t suggest that you ripped off his portfolio. (I get that you don’t like it.) What I’m suggesting is that you think it’s a “paradigm shift” to suggest that people have a “savings portfolio” — as if you were the first person to suggest that people not risk the money they can’t afford to lose.

  • Johnny Evers

    Agree with Shane here.
    It sounds as if you have your own version of a permanant portfolio. No harm in that, but it’s still one man’s opinion of what is safe vs. another man’s opinion.

  • http://www.orcamgroup.com Cullen Roche

    Shane, I realize that I am not the first person to come along with the idea that people should allocate their money in a way that is low fee, low risk, etc etc. John Bogle has been carrying that torch for decades and I often write about him here. I do think the idea of properly understanding saving vs investment is a paradigm shift as it properly defines what we are doing as opposed to buying into the idea that we are investing (something that even Harry Browne did not fully clarify). Maybe “paradigm shift” is a little dramatic. It’s an important clarification. Is that better? :-)

  • Shane

    Exactly. At least Mark Hulbert — who also had a different idea of what one’s “savings portfolio” should be gave credit where credit is due…

    I recommend to clients a technique from Harry Browne, who used to write an investment newsletter called Harry Browne’s Special Reports and who was the Libertarian Party candidate for president last fall. His advice is to divide your portfolio in two. The first part, containing the bulk of your assets, would be a so-called permanent portfolio whose composition would not change very often. The second would be a lesser portfolio in which you could speculate and trade to your heart’s — and psyche’s — content.

    This approach has several virtues. Assuming that you allocate a relatively high portion of your permanent portfolio to equities and other risky assets, you will be largely protected from the effects of myopic risk aversion in your smaller, more actively traded portfolio. And it is psychologically realistic, because it recognizes that you want to check your results constantly, and to make frequent changes.

    Finally, here is another helpful psychological trick: View the two parts of your portfolio as a competition. Your challenge is to do better over many years in your repeatedly checked and changeable portfolio than in your permanent one. — Mark Hulbert

    Source: https://www.nytimes.com/2001/04/08/business/strategies-the-blinding-power-of-data.html?pagewanted=2&src=pm

  • http://www.orcamgroup.com Cullen Roche

    Not sure how much clearer I can be on this. I would NEVER recommend a 50% cash and gold portion. If 50% of my portfolio being different than the PP = a “version of the PP” then you are having problems with arithmetic. No offense, but I am a little offended that someone would accuse me of ripping off the PP when 50% of my portfolio is radically different. It’s literally night and day. You’d be more accurate saying the Nasdaq and S&P 500 are the same thing. Of course, that’s wrong. But it’s much more accurate than what you’re accusing me of….

  • Boston Larry

    A more reasonable permanent portfolio, or all-weather portfolio, in today’s world would be about 30% equities, 60% all varieties of fixed income, 5% commodity index fund (not all gold), and 5% short-term (cash). Gold is way too volatile to make up 25% of one’s portfolio. My favorite all-weather balanced fund is Vanguard Wellesley Income (VWINX). Check out how well it held up in both the 2000 and 2008 downturns. It has beaten the S&P 500 in both the last 5 and 10 year periods.

  • Shane

    I never, ever, said that you ripped off the Permanent Portfolio allocation. Never said it.

    All I said is that you ripped off the concept of people creating a separate low-risk savings portfolio — as if it were your revolutionary idea — and you called it a “paradigm shift”. Even Mark Hulbert understood where the idea came from in his 2001 piece in the New York Times (see above).

  • http://www.orcamgroup.com Cullen Roche

    That’s called core and satellite. It’s not revolutionary and there are THOUSANDS of different ways that this can be implemented. You’re basically taking every multi-strategy portfolio ever created and claiming that Harry Browne deserves credit for all of them. That’s absurd. I never even read Harry Browne until years after I came up with all this….In fact, I’ve never even read his book and I think the PP is a silly gimmick that’s currently hot and won’t be in 10 years.

  • Cowpoke

    “Investment is income not consumed for future production.”
    Is that a mis-type?

  • http://www.orcamgroup.com Cullen Roche

    purchases not consumed for future production….thanks.

  • http://www.orcamgroup.com Cullen Roche

    In fact, I am going through the returns on the PRPFX and they were AWFUL before 2003. The 20 year annual returns were 1.5% before gold went crazy. And they were NEGATIVE in real terms for 20 years. That’s protection against purchasing power loss??? That’s your great portfolio construction? I know it’s been hot lately, but this is an awful portfolio design. The entire idea is awful, come to think of it. It might sound clever and it might have performed well in the last 10 years, but that doesn’t mask the horrid performance between 1983-2003. If I am “rebranding” that idea then I am an idiot. I mean, this is madness. I don’t like to talk badly about other fund ideas, but I can’t believe how so many people have fallen for this idea. Harry Browne’s definitions were wrong and his implementation is wrong. The whole thing is wrong.

    This conversation is a great lesson. If you’ve bought into this Harry Browne gimmick in recent years – be careful. The next 10 years WILL NOT look like that past 10….

  • Shane

    If “core and satellite” are so commonplace, why are you describing it as a “paradigm shift”? You make it sound like you invented the concept in this blog post.

  • http://www.orcamgroup.com Cullen Roche

    Most multi-strategy portfolios are in a hedge fund structure and sold as “investments” or Ferraris. Did you read the post or are you just being difficult? Btw, I’d love your opinion on the 20 year stretch where PRPFX was negative in real terms. I think everyone reading this website deserves to know why this strategy is so amazing when it clearly doesn’t achieve what you claim it does (and what you claim I have “rebranded” – as if I have “rebranded” something that does not even achieve what I discuss!). More importantly, why should anyone buy into this idea TODAY? If you’re going to accuse me of stealing other people’s ideas you should be better prepared to defend your position. Thus far, all I see is another case of recency bias where a recent high performing fund is being touted as the next great thing and the Harry Browne worshippers all think he’s created some sort of holy grail and is somehow the grandfather of every multi-strategy fund ever created (even though his strategy was awful for 2 decades during one of the best best periods in stock market history)….

    Let me guess? You just bought into this idea in the last 10 years? I know guys who know the managers of these funds and they remember the 80’s and 90’s. Believe me, they were not kind years to funds like this. This is a classic case of good recent performance and a failure to take the long view (which, ironically, is what the entire portfolio is designed around).

    You seem to think you’ve stumbled upon some sort of holy grail and that Harry Browne is now the savior of all small investors. Au contraire. You might want to focus a bit more on John Bogle if this low fee DIY structure is your thing. Harry Browne’s PP is no holy grail. It never has been aside from ONE decade in THREE.

  • Geoff

    I’d go at least 50% equities.

  • Gosso

    From 1972 to 2011

    100% Wellesley…………. CAGR = 10.0% STDEV = 9.3%

    75% Wellesely / 25% Gold… CAGR = 10.5% STDEV = 8.0%

    Source: http://www.bogleheads.org/forum/viewtopic.php?t=2520

    Ever since gold was set free, it seems to have a nice negative correlation to stocks/bonds, which helps to reduce portfolio volatility and provide a smooth real return. 25% in gold might be too much for most people, but I think at least 10% is reasonable.

  • Gosso

    Sorry, the formatting is horrible in my above post, lets try this again:

    From 1972 to 2011:

    100% Wellesley
    CAGR = 10.0%
    STDEV = 9.3%

    75% Wellesely / 25% Gold
    CAGR = 10.5%
    STDEV = 8.0%

  • http://www.orcamgroup.com Cullen Roche

    Interesting fund. I’ll have to take a look into that. Thanks guys.

  • LVG

    The actual Harry Browne portfolio is different from PRPFX, but not very practical for most investors because you have to buy the gold coins and t-bonds yourself. It looks like the funds that have tried to copy this approach haven’t done quite as well as the paper results.

  • http://www.orcamgroup.com Cullen Roche

    That tends to always be the case with something fanciful like this. It looks great on paper and then when you implement it turns out to be a nightmare hitting up the Treasury Direct window for 30 year bonds or the local gold shop for American Eagle Coins….

  • LVG

    Even worse if you bought the GLD fund and paid the K1 tax rates for 10 years.

  • Shane


    I’m not sure what you are talking about. Most Permanent Portfolio holders do not invest in PRPFX. Harry Browne’s 4×25 Permanent Portfolio has produced very steady returns for 40 years.

    Here is an inflation adjusted chart:


    See CrawlingRoad’s annual Permanent Portfolio performance results for more details:


    PRPFX does NOT equal the 4×25 Permanent Portfolio. The 4×25 Permanent Portfolio did just fine pre-2003.

    (And the idea that buying Treasuries (at Vanguard) or Gold (from Tulving) is somehow difficult is a little silly. It’s no more difficult than calling up the offices of Orcam).

    I wouldn’t expect you to endorse such an easy portfolio. If you did, nobody would have a reason to call you up for a portfolio review. ;)

  • http://www.orcamgroup.com Cullen Roche

    Well Shane, the only actual “Permanent Portfolio” that has been traded in real-time is the PRPFX. So all that paper trading and back testing charts is great, but it’s useless. Anyone who’s been in the game for more than a few years knows that there’s a huge difference between paper trading and real trading. I know it’s simple to look at past returns and say “my strategy does this”, but the proof is in the pudding. And the pudding from PRPFX tasted pretty rotten for 20 years. Now it’s all the rage.

    That’s fine. I am not going to sit here and twist your arm into believing me. I am certainly not going to twist your arm into utilizing my services via Orcam. You’ve concluded that the Harry Browne portfolio a great portfolio and that he deserves credit for revolutionizing multi-strategy approaches. I disagree. We won’t know who is really right until 2023 or 2033. But by then it’s likely that investors will have moved onto the next hot thing and this conversation will be long forgotten….

    And the dig at Orcam is nice of you. You know Orcam is about more than just selling reviews and research. I teach people about the monetary system and money. I presume that’s why you’re here after all? I find it ironic when people take a dig at what I do professionally and then act horrified that I charge for services related to my expertise (even though I don’t even manage money and am a fee only consultant!). Even Harry Browne would have approved of the direction I am taking Orcam since I am trying to help people avoid asset managers and instead feel empowered to take control of their own portfolios….That’s the whole point of a review after all….You make my firm sound like a vampire squid or something that is just leaching off of society….

    Good luck to you. I sincerely wish your approach well!

  • Shane

    Not sure what you are talking about. PRPFX does NOT equal the 4×25 Permanent Portfolio. The do-it-yourself 4×25 Permanent Portfolio has produced very steady and low-volatile returns for 40 years.

    and Inflation-adjusted: http://goo.gl/YK5hC

    Furthermore, you wrote:

    At Orcam we believe your saving portfolio should achieve two primary goals:
    1) It should protect against the potential for permanent loss.
    2) It should reduce the risk of purchasing power loss.

    The 4×25 Permanent Portfolio has done exactly that for 40 years. Not sure why you would be so critical of a strategy that produces steady low-risk returns during times of inflation, deflation and prosperity.

  • Shane

    Thanks, Cullen. I just don’t understand how you can criticize the Permanent Portfolio but give your blessing to the “All Weather Portfolio”. They are very much based on the same “savings portfolio” strategy (i.e. 4×25% assets for inflation, deflation, prosperity and recession).

  • http://www.orcamgroup.com Cullen Roche

    It sounds like you’re not that familiar with all of this. Here’s from the History page on the PRPFX website:

    “Established in 1982, in an era of stagnant economic growth and rampant inflation, Permanent Portfolio seeks to provide a sound structure and disciplined approach to asset allocation. The Fund was born in an environment where investors didn’t know where to turn. Regardless of what an investor did, they were losing money. Harry Browne, one of the founders of the fund stated, “It’s easy to think you know what the future holds, but the future invariably contradicts our expectations. Over and over again we are proven wrong when we bet too much on our expectations. Uncertainty is a fact of life.” No one can accurately predict the future. “

    Harry Browne was one of the founders! And clearly, his strategy and those he was advising or teaching his strategy to were not able to actually generate the returns you claim. If Harry Browne can’t do it then why can you?

    I think it’s ironic that Browne’s fund was founded on the back of a huge gold bull and then languished for 20 years. Does that remind you of any period, like, maybe right now?

  • http://www.orcamgroup.com Cullen Roche

    I never gave my blessing to the all weather portfolio! I don’t “give my blessing” to any fund. If I did I wouldn’t run my own money!

  • Shane

    You sure about that? Here’s a blog post where you said:

    Here’s a good post on an attempt to analyze and rebuild Ray Dalio’s All Weather portfolio strategy. It’s a similar idea to the Permanent Portfolio, an idea I think makes a lot of sense in terms of portfolio construction for the passive investor.


    Sounded like a blessing to me! :)

  • micro2macro

    “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative” (Graham and Dodd, p.106). So “It should be essential, therefore, for anyone engaging in financial operations to know whether he is investing or speculating and, if the latter, to make sure that his speculation is a justifiable one” (Graham and Dodd, p.101).

  • http://www.orcamgroup.com Cullen Roche

    “Nothing on this website should be interpreted to state or imply that past results are an indication of future performance or misconstrued as investment advice. This website is in no way a solicitation or an offer to sell securities or investment advisory services.”


  • Shane


    PRPFX was Harry Browne’s first iteration of the Permanent Portfolio concept — of which he was an advisor (not a manager). It was too difficult for the average person to do on their own. This bothered him. So, in 1987, he wrote, “Why The Best Laid Investment Plans Usually Go Wrong” where he unveiled the DIY- 4×25 approach. Anyone who has followed the 4×25 approach since the day the first edition was released in 1987 (right before the stock market crash) did quite well with their savings portfolio”.

    Again, it really isn’t that different from the “All Weather Portfolio,” which you already endorsed in that blog post. So, I still can’t figure out why you are still trying to argue against it.

  • Shane

    And on a side note, while I don’t endorse PRPFX, it’s important to note that PRPFX did poorly during the 90s due to poor stock picking in the stock allocation. (Whereas the 4×25 approach uses a stock index fund for the stock allocation). PRPFX also issued a higher dividend during that time. In the 2000s, they reduced the dividend to nearly nothing and the stock performance reflected that along with better stock picking.

    I don’t endorse PRPFX, and it really is a different animal from the 4×25 approach. Not sure why you keep coming back to it when I keep telling you that the 4×25 approach is very similar to the “All Weather Portfolio” — a fact you acknowledged and appeared to endorse in that earlier blog post.

  • http://www.orcamgroup.com Cullen Roche

    Like I said yesterday, anyone expecting bonds and gold to do as well in the next 10 years as they have in the last 10 years is probably taking a bit more risk than they think. I absolutely DO NOT endorse PRPFX or even a 4X25 as you state. I’ve been abundantly clear on this website that I would never put more than 5-10% of my portfolio in gold. So please don’t read into my comments too much. I think the general premise of the All Weather and PP and Bogle and Lazy Portfolio is well reasoned and generally fine for passive investors, but it is absoultely positively not my preferred approach to portfolio construction.

    As I said, I wish you well. I hope your approach does well for you. I don’t wish ill on other investors. But I can’t state this more clearly – people betting on the Permanent Portfolio to perform as well in the coming 10 years as it has in the previous 10 years are likely suffering from recency bias. So I guess I part ways with Harry Browne when he says “beware of forecasters” because I am making a forecast that bonds and gold will not do as well as they have…..But, if you’re true to Harry Browne, you probably don’t care for that opinion to begin with. :-)

  • Shane

    Yes. Much better! :)

    I see your point now. Just seemed like you were trying to unveil a new concept when I first read it.

  • Shane

    That’s exactly correct. I’m no fan of forecasts, but of all the forecasts I think yours are among the best (since you understand the monetary system better than most people).

    Having given you that terrific complement :), can you foresee a situation where gold, stocks and bonds all get demolished over a 10 year period? Your chart in the following blog post (as Harry Browne postulated) suggests that one of the four asset classes will always be in demand at any given time (save recessions when cash is desired).


    If you could conceive of such a situation, my guess is even Cullen Roche’s portfolio would be doing terrible (no offense)!

  • Pete

    I swear, sometimes I think you post stuff just to argue with people, Cullen. What’s next, are you going to say central banks hold gold because of tradition?

  • Dan

    Hi Nils,

    Yes, I suppose it’s unconventional. I use a consumption smoothing model, so my model shows that with 6% nominal (and several other key variables like inflation assumption etc.) that I can create a smooth living standard in today’s dollars through age 100. I’m happy with the living standard that 6% provides, so I see no reason to take risk to try to get more than 6%. If I were to try to get 7% I’d have to expose myself to more risk–right? But why would I do that when I’m happy with the living standard projected at 6%. There’s lots of variables like my declining cost of housing (in today’s dollars) and some assumptions about taxes, projected SS, etc. But that’s the main idea.

  • SS

    Central banks do hold gold because of tradition.

  • Boston Larry

    @Gosso, from what source did you obtain the long-term info on Wellesley like CAGR and STDEV? I knew the fund had done well for the last 10 yrs, but I didn’t know it has done so well for 40 years. Thanks!

  • http://www.orcamgroup.com Cullen Roche

    I hate arguing with people on the internet. But not as much as I hate being accused of “ripping off” someone else’s ideas when I don’t espouse anything close to that person’s ideas….

  • http://None Midas II

    micro2 macro. You might be surprised at the frequency.

  • CommonSense

    LOL! Good one, SS. You would make Bernanke so proud!

  • Gosso

    Boston Larry,

    The Boglehead’s (an online group of people dedicated to the work of Jack Bogle) have created a fantastic tool to easily backtest various portfolios back to 1972. It is called the Simba Spreadsheet. You can download it from the link below (first link in the thread):


    Vanguard’s Wellesley Fund has performed very well over the past 40 years (at least for a “Savings Portfolio”), but it had a tough time in the 70’s where it had a negative real return. Adding gold to it corrected this, but of course this hurt returns during the stock bull and gold bear from 1980-2000. I see gold as the “Robin Hood” asset, it steals from the highly productive years and gives to the poor years, resulting in smoother returns.

    Below are the five year REAL returns for Wellesley with and without gold:

    100% Wellesley
    1972-1977 0.4%
    1977-1982 -3.0%
    1982-1987 17.0%
    1987-1992 6.8%
    1992-1997 8.0%
    1997-2002 7.5%
    2002-2007 4.6%
    2007-2012 3.8%

    75% Wellesley / 25% Gold
    1972-1977 6.9%
    1977-1982 3.0%
    1982-1987 11.9%
    1987-1992 3.7%
    1992-1997 5.5%
    1997-2002 3.7%
    2002-2007 7.2%
    2007-2012 7.2%

  • Dar

    For some saving but others speculation.

    Therefore, it is bad for gvoernments to pop up financial markets and brag about it. A popped up financial market create multiple claims on the same underline real assests. It is like everyone believes that he/she has 5 chairs but in reality there is not even chairs for every 5. It sows seeds for deflation.

    Of course, governments like tax revenue from popped up financial markets, so do most academics so their universities can continuously funded. Now, administration, Fed, Congress, and many Amercians have been kidnapped by the financial market.

    If people and government start thinking financial markets are for people to save money, not to create credits from thin air, it would be much better.

    Of course polticians alone with many elected them cannot miss the short term gain from financial speculation.

  • Android

    not consumed = unspent? Is not the consumption of goods and services funding the continued production of those goods and services? Wasn’t the original function of stocks similar to a bond in that it was a way for the company to fund future productions? I am not trying to be difficult. I too want to be precise about the definitions.

  • http://www.orcamgroup.com Cullen Roche

    Should read “purchases not consumed”. What a dope. Here I am railing on about definitions and I get it wrong….Sorry.

  • Stephen

    “Ferrari” …LOL how wrong can you be. Har and tortoise analogy for you. All my life I’ve had people roaring past me in the “Ferrari” only to pass them in my Oxford Minor at the next bend in the road. ‘Winning’ isn’t about speed,and neither is it about investment and on that score I understand exactly what Cullen is talking about.

  • Nils
  • http://www.orcamgroup.com Cullen Roche

    I’ve been that guy, unfortunately. Luckily, the readers at Pragcap are a lot more sane than many other sites so it doesn’t happen often! :-)

  • Alberto

    poor understanding of the physical world (and the mathematics and physics we were able to develop to partially understand it) is much worst that poor understanding of the monetary system. Everybody that is not clearly an idiot knows that a government owning his own currency cannot run out of money BUT Economy is not money constrained but resources constrained so it’s much better to understand the real situation here before even start talking about long term returns on this and that. Furthermore social-economic systems are not stationary and notr ergodic so past statistics are totally meaningless in the long term. This time is really different and the people that will try to forecast the future of the markets are just wasting their precious (and only real) resource: time

  • Lucas

    I would like a clearer comparison of the two definitions with examples, especially the “purchases not consumed for future production.” I would like to see different examples of what constitutes “saving,” and why, versus what constitutes investment, and why. I mean with both saving and investment, I am setting aside income for something that is not strictly a consumable, like rent, food, clothes, books, etc. Also, for example, how is “saving” for retirement by putting money in a lousy quality 401(k) with no match and principal exposed to loss not actually “investment?”

  • Waitingtoretire

    Very insightful……….thanks

  • Johnny Evers

    Instead of defining savings as ‘income unspent’, I would make it more exact: savings is ‘spending deferred.’

  • Lucas


  • http://www.orcamgroup.com Cullen Roche

    You can think of investment as having a multiplier and inherently more risk. When I buy a desk for my office I am making an investment. I am purchasing something for use in future production. I am not merely consuming it like I would if I bought a candy bar. This is very different from saving where you are literally putting money under a mattress in some cases. The standard “investing” idea is really not investing at all. You’re not purchasing something for use in future production. You’re just allocating your savings. Make more sense? Sorry I missed this the first go around. A lot gets lost in the weeds here…

  • Ingrid

    There you have Japan, having too little kids and saving far too much.