Dhirendra Kumar: Why Saving in Separate Pouches Beats Pooling

The drawstring on that pouch was not there to earn a better return, Kumar wrote. "It was there as a small piece of friction between the household and its own worst impulses." That friction is a feature.

This is where experienced investors trip over the very thing they believe they have outgrown. Having read enough and traded enough to feel that the basics are beneath them, they collapse their savings into one large, cleverly managed heap and lose the match between a particular sum of money and the particular purpose it was meant to serve. They are too busy with asset allocation models and tactical tilts to notice that they no longer know which part of their wealth is standing behind their child's education and which part they are free to take risks with. The answer, in practice, is that all of it is available for risk-taking.

Kumar's argument is not about the arithmetic of returns. It is about protecting each goal from the others and, more than that, protecting all of them from you. When the tempting idea arrives, as it always does, the pouch system reminds you that this money already has a different job to do.

The system may look inefficient because it refuses to let capital flow to wherever it might do best. That refusal is the point. The efficiency that sophisticated investors like solves a problem the beginner does not have. The inefficiency they mock actually creates a problem.