Question about PP vs 100% cash

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jalanlong
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Question about PP vs 100% cash

Post by jalanlong » Sat Oct 26, 2019 11:05 am

I have a question for everyone. I have a friend who may be called a minimalist and has amassed quite a bit of savings over the years. And he has never invested a penny in stocks, gold, etfs or really anything but cash in the bank. He has an interesting point of view and has given me articles written by people like Mark Cuban which espouse the same theory. His theory goes that instead of having a balanced portfolio of investments like the PP and take on risk to earn maybe 6% a year, he chooses to earn 2% on his cash hoard and then earn risk free returns with what having that much cash can do for him.

He gives me lots of examples: By paying cash for cars he can take advantage of getting better deals and of course paying zero interest since he never has to take a loan. He can pay for his auto insurance up front for a year and saves like 15% doing that. He buys household items in bulk and can save up to 30% doing that. He can (and will) go on and on but the upshot is that having a hoard of cash ensures him the ability to save $$ on things and get a risk free return that is comparable to a balance portfolio.

I asked him what about worries such as inflation or deflation. His response was that in a inflation scenario he has purchased items in bulk so he is not in as bad a position as people who did not have a stockpile of things. In deflation he has cash to take advantage of things being cheaper.

I will admit his approach sounds simple and I did not have a great response to it. What are your opinions?
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Re: Question about PP vs 100% cash

Post by Tyler » Sat Oct 26, 2019 11:25 am

jalanlong wrote:
Sat Oct 26, 2019 11:05 am
He gives me lots of examples: By paying cash for cars he can take advantage of getting better deals and of course paying zero interest since he never has to take a loan. He can pay for his auto insurance up front for a year and saves like 15% doing that. He buys household items in bulk and can save up to 30% doing that. He can (and will) go on and on but the upshot is that having a hoard of cash ensures him the ability to save $$ on things and get a risk free return that is comparable to a balance portfolio.
Cash is great, but your friend should embrace the freeing power of "both". I do all of those things and I'm not sitting on 100% cash.
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Re: Question about PP vs 100% cash

Post by shekels » Sat Oct 26, 2019 11:42 am

jalanlong wrote:
Sat Oct 26, 2019 11:05 am
I have a question for everyone. I have a friend who may be called a minimalist and has amassed quite a bit of savings over the years. And he has never invested a penny in stocks, gold, etfs or really anything but cash in the bank. He has an interesting point of view and has given me articles written by people like Mark Cuban which espouse the same theory. His theory goes that instead of having a balanced portfolio of investments like the PP and take on risk to earn maybe 6% a year, he chooses to earn 2% on his cash hoard and then earn risk free returns with what having that much cash can do for him.

It seems even 2% still involve some risk.Granted very low IMHO.
But is seems you have a friend that has figured out how to live within one's means.
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Re: Question about PP vs 100% cash

Post by vnatale » Sat Oct 26, 2019 11:56 am

I echo this response. The frugal lifestyle has many benefits. No debt and lots of savings. Of course, you don't live the lifestyle of the typical American but it all comes down to what you value most.

Vinny
Tyler wrote:
Sat Oct 26, 2019 11:25 am
jalanlong wrote:
Sat Oct 26, 2019 11:05 am
He gives me lots of examples: By paying cash for cars he can take advantage of getting better deals and of course paying zero interest since he never has to take a loan. He can pay for his auto insurance up front for a year and saves like 15% doing that. He buys household items in bulk and can save up to 30% doing that. He can (and will) go on and on but the upshot is that having a hoard of cash ensures him the ability to save $$ on things and get a risk free return that is comparable to a balance portfolio.
Cash is great, but your friend should embrace the freeing power of "both". I do all of those things and I'm not sitting on 100% cash.
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Re: Question about PP vs 100% cash

Post by Kriegsspiel » Sat Oct 26, 2019 12:31 pm

jalanlong wrote:
Sat Oct 26, 2019 11:05 am
I have a question for everyone. I have a friend who may be called a minimalist and has amassed quite a bit of savings over the years. And he has never invested a penny in stocks, gold, etfs or really anything but cash in the bank. He has an interesting point of view and has given me articles written by people like Mark Cuban which espouse the same theory. His theory goes that instead of having a balanced portfolio of investments like the PP and take on risk to earn maybe 6% a year, he chooses to earn 2% on his cash hoard and then earn risk free returns with what having that much cash can do for him.

He gives me lots of examples: By paying cash for cars he can take advantage of getting better deals and of course paying zero interest since he never has to take a loan. He can pay for his auto insurance up front for a year and saves like 15% doing that. He buys household items in bulk and can save up to 30% doing that. He can (and will) go on and on but the upshot is that having a hoard of cash ensures him the ability to save $$ on things and get a risk free return that is comparable to a balance portfolio.

I asked him what about worries such as inflation or deflation. His response was that in a inflation scenario he has purchased items in bulk so he is not in as bad a position as people who did not have a stockpile of things. In deflation he has cash to take advantage of things being cheaper.

I will admit his approach sounds simple and I did not have a great response to it. What are your opinions?
You don't need to stockpile cash in excess of what you need to buy those things in bulk. In addition, if you're buying in bulk and calculating your days-of-supply, you are able to forecast when you will need to repurchase whatever supplies you're buying, with a lot of flexibility built in to the system. So if you buy a years supply of toilet paper, you don't need to have a pile of cash, you just need to set aside some cash from your income so as to have enough on your scheduled bulk purchase day. Same with buying cars or whatever else for cash. If he's piling up cash in excess of his needs so that he can buy other stuff he hasn't thought of buying yet, he's just a spendthrift, and you shouldn't be listening to his advice.

I'd like to see the Mark Cuban articles he gave you, because Mark Cuban puts his assets into businesses and real estate, not cash. Mark Cuban just recommended buying in bulk to save money*. It sounds like your friend is kindasorta employing the Alpha Strategy of converting all currency into physical items, but instead of buying the items now (to beat inflation), he's letting it sit in cash instead.

FWIW, I do the same things he does. Buying cars and real estate for cash, buying supplies in bulk, paying for auto insurance with the bulk discount. But assets that I'm not using to buy things are invested in ways that have a higher return than simple cash. So the difference is in whether the excess cash he sits on is more productive than the equivalent amount in a PP; I believe the PP will earn higher returns than cash without unnecessary risk.

* from that same link: "Despite his sometimes lavish spending, Cuban keeps a frugal mentality much of the time. For example, he insists on buying items in bulk, especially items he knows he'll need such as razors and toothpaste." And from here: “The key is living within your means. Saving money and putting some into a low-cost mutual fund — like an SP 500 fund — and living as inexpensively as you possibly can, will pay off dividends,” Cuban says.
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Re: Question about PP vs 100% cash

Post by jalanlong » Sat Oct 26, 2019 3:30 pm

Here are a couple of articles he pointed me to. Although they are older articles.


http://blogmaverick.com/2010/08/25/the- ... -ever-get/

http://blogmaverick.com/2006/01/02/my-i ... -for-2006/
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Re: Question about PP vs 100% cash

Post by europeanwizard » Sun Oct 27, 2019 1:14 am

It seems to me that there's a limit to the "yield", namely it's bounded by what you consume. On the other hand, the PP its yield is limited to what you have in your investment account.

So it probably works in the sub-100K dollar/euro range. Then the PP starts to win.

Edit: just read the first link you posted, and I'm apparently just repeating it:
If you have under 100k dollars in liquid assets, your net worth will be higher in one year if you follow this advice
The second link is really for the same sub-100k crowd, it advises to 1. keep cash 2. lower expenses and 3. invest in yourself. This is often key when you're starting out. However if you already have done those things, then the PP is a good choice IMHO.
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Re: Question about PP vs 100% cash

Post by mathjak107 » Sun Oct 27, 2019 3:57 am

it really is a poor comparison .... investing is your money working for you while you work for your money ...what your expenses are and what you spend has nothing to do with the income side of things . they are on two different sides of a balance sheet .

cutting expenses only looks like more income until there is nothing left to cut . then when expenses keep rising you learn the difference between the two all to quickly .

that is why wall street looks at revenue and profits . profits can come from cost cutting but that has a bottom . growing income can be endless .

kitces points out .. people tend to sweat the petty expenses like starbucks and blow big dollars on their transportation and housing ... but in any case more income and reduced spending are not a proxy for each other .

"EXECUTIVE SUMMARY
The personal finance space has no shortage of tips to managing your spending, from bag lunches in lieu of eating out at work to home-brewed coffee instead of the morning Starbucks routine. Yet the reality seems to be that in so many situations, we dig ourselves a tremendous spending hole because of our big purchases, and then worry tremendously about the small stuff trying to make up the difference. If you really want to change your financial reality for the better, though, it’s the big stuff you really need to focus on – where you live, and what you drive."



https://www.kitces.com/blog/worried-abo ... all-stuff/
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Re: Question about PP vs 100% cash

Post by sophie » Sun Oct 27, 2019 10:17 am

This type of volatility-wary investor might benefit from reading "Your Money or Your Life". The investing style recommended in that book is to buy long US Treasury bonds and hold them to maturity, as well as keeping a sizeable cash reserve. His biggest danger is that his money is NOT stable, it's actually dwindling in real terms due to inflation..

I realize there isn't a huge gain to long treasuries at the moment, but unlike T bills or online savings accounts, the 30 year bonds (after tax) are keeping ahead of inflation. I Bonds are good too, in fact that might be his first option.

You don't need 100% of assets in cash in order to be able to do things like pay for a car in cash. A good goal to shoot for might be the PP's proportion of 25%, or 5 years expenses.
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Re: Question about PP vs 100% cash

Post by vnatale » Sun Oct 27, 2019 11:51 am

Exactly! Where you live and what your drive!

I've lived in the same cheap house since April 30, 1982 (shades of Warren Buffet?). And, drive a 2004 Honda Accord (another Buffet trait). People are astounded when I tell them how much I have spent on cars in my entire life. And, with my last four vehicles being Honda Accords (and the last three of those being fully loaded).

From a young age I've valued personal financial freedom over being a slave to a job because I had to have it to support all certain financial demands (like mortgages and car payments).

But both of those - mortgages and car payments - seem to be ingrained in Americans at a young, young age. Even before they graduate high school.

Vinny
mathjak107 wrote:
Sun Oct 27, 2019 3:57 am
it really is a poor comparison .... investing is your money working for you while you work for your money ...what your expenses are and what you spend has nothing to do with the income side of things . they are on two different sides of a balance sheet .

cutting expenses only looks like more income until there is nothing left to cut . then when expenses keep rising you learn the difference between the two all to quickly .

that is why wall street looks at revenue and profits . profits can come from cost cutting but that has a bottom . growing income can be endless .

kitces points out .. people tend to sweat the petty expenses like starbucks and blow big dollars on their transportation and housing ... but in any case more income and reduced spending are not a proxy for each other .

"EXECUTIVE SUMMARY
The personal finance space has no shortage of tips to managing your spending, from bag lunches in lieu of eating out at work to home-brewed coffee instead of the morning Starbucks routine. Yet the reality seems to be that in so many situations, we dig ourselves a tremendous spending hole because of our big purchases, and then worry tremendously about the small stuff trying to make up the difference. If you really want to change your financial reality for the better, though, it’s the big stuff you really need to focus on – where you live, and what you drive."



https://www.kitces.com/blog/worried-abo ... all-stuff/
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Re: Question about PP vs 100% cash

Post by vnatale » Sun Oct 27, 2019 2:00 pm

However this does seem to make the case that the Starbucks choice can end up costing a TON of future money!

Are You Paying $106,000 For Coffee?
https://www.valuewalk.com/2017/10/paying-106000-coffee/

Vinny

mathjak107 wrote:
Sun Oct 27, 2019 3:57 am
it really is a poor comparison .... investing is your money working for you while you work for your money ...what your expenses are and what you spend has nothing to do with the income side of things . they are on two different sides of a balance sheet .

cutting expenses only looks like more income until there is nothing left to cut . then when expenses keep rising you learn the difference between the two all to quickly .

that is why wall street looks at revenue and profits . profits can come from cost cutting but that has a bottom . growing income can be endless .

kitces points out .. people tend to sweat the petty expenses like starbucks and blow big dollars on their transportation and housing ... but in any case more income and reduced spending are not a proxy for each other .

"EXECUTIVE SUMMARY
The personal finance space has no shortage of tips to managing your spending, from bag lunches in lieu of eating out at work to home-brewed coffee instead of the morning Starbucks routine. Yet the reality seems to be that in so many situations, we dig ourselves a tremendous spending hole because of our big purchases, and then worry tremendously about the small stuff trying to make up the difference. If you really want to change your financial reality for the better, though, it’s the big stuff you really need to focus on – where you live, and what you drive."



https://www.kitces.com/blog/worried-abo ... all-stuff/
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Re: Question about PP vs 100% cash

Post by mathjak107 » Sun Oct 27, 2019 7:14 pm

You missed the point ...save 300-500 a month on housing and 200-300 a month on a car and you can have all the starbucks you want along with a Starbucks goodie and you will still be way way ahead
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