Read of the Day: The “Investment” Myth

I wrote this yesterday for the Orcam Insights page.  It discusses what I believe is a deeply misleading myth in the investment world.  This idea that your portfolio is “investment”:

“At Orcam we view your savings as a repository that results from your primary source of income. It’s important not to put the cart before the horse here. Most savers want to protect against the two aforementioned risks so they can then retire and draw on this saving when it is most needed. So you should be thinking about your saving portfolio as a repository that flows form your primary source of income. And that means the best investment you’ll ever make is in your primary flow of income or your job or specific area of expertise. Instead, many savers fall for the Wall Street myth that your saving portfolio will generate returns that make you fabulously wealth thereby offsetting or replacing your primary source of income. This is not the correct way to view your saving portfolio and will substantially increase the odds of failing to meet the goals for your savings.”

Read the full piece here.

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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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  • JB McMunn

    The way Figure 1 is drawn one would be led to conclude that you should never invest in bonds because the risk is elevated above cash and the return is below cash. Government and corporate bonds are both shown to the left of cash on the x-axis (lower return) while higher than cash on the y-axis (risk).

    Similarly, the graph suggests that private equity provides lower risk (lower on the y-axis) and higher return (farther to the right on the x-axis).

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

    That’s what happens when you mix up the axes. Thanks for pointing it out. I fixed it.

  • SS

    Great read. Potentially paradigm shifting for many investors.

  • LRM

    Good article and provides insight into where Orcam would place it’s focus.

  • Johnny Evers

    Savings are for emergencies. Investments are designed to replace income when you can’t work, or to provide income for your heirs.
    Because of inflation, putting long-term money in a savings account is risky.

  • jaymaster

    I noticed a spelling/word error: “So you should be thinking about your saving portfolio as a repository that flows FORM your primary source of income”

  • jaymaster

    And BTW, I don’t want to seem nit picky here. I just don’t want you looking sloppy to your potential customers!

  • Wantingtoretire

    But don’t people always look at this way………….?

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

    Thanks Jay. I appreciate that.

  • DanH

    Most people I know don’t think of their “investment” portfolio as a savings account. In fact, I work in finance and this is the first time I’ve ever thought about it like that.

  • dctodd27

    Your point seems to be that since your cash does not flow through to the end company (i.e. you are just buying the security on a secondary exchange from someone else), then it is not an investment. My impression is that you have this precisely backwards. What *does* make it an investment is that by buying this security on an exchange, the end company’s cash (or at least a portion of it) will flow through to YOU. As a stockholder, you have a claim on a portion of the company’s future cash flows, and as long as you don’t pay too high a price for the stock you have *invested* to your own benefit.