Title: Jared Dillian: The Awesome Portfolio: Why Smoother Returns Beat Bigger Ones
Show: Talking Billions (host: Bogumil Baranowski, Blue Infinitas Capital LLC)
Guest: Jared Dillian — The Daily Dirtnap / Jared Dillian Money; former Lehman Brothers index-arbitrage and ETF trader
Date: 2026-09-06
URL: https://youtu.be/RIxBkxE3oqM
Length: 53:20
Note: Auto-captions, cleaned. Fillers (um/uh/you know as interjection) removed and stutters collapsed; wording
      otherwise verbatim. ASR name mangles corrected: Bogumil Baranowski, Blue Infinitas Capital, The Daily
      Dirtnap, Lehman, Harry Browne, Sharpe/Sortino, Nick Maggiulli ("Just Keep Buying", "The Wealth Ladder"),
      Michael Green, the Magellan Fund, life hedge, REIT ETF, 80-vol, Balyasny, Fiscal AI. The host's compliance
      disclosure (01:27–03:07) and the two host-read Fiscal AI sponsor reads (03:07–04:18, 52:22–52:43) are
      marked inline and are NOT content — they are excluded from the analysis, and Fiscal AI is not a pick.

(00:00) In 2008, I experienced the crash. I worked at Lehman. I had a bunch of Lehman stock that went to zero and I basically took a 50% drawdown of my own net worth and I said I never want to do that again, right? So basically my trading, all my work since then has revolved around not so much being a hedge fund but really working hard especially to minimize drawdowns but also to have an efficient use of risk.
(00:31) So, one of the things I talk about in the book is, up until 2019 when I discovered the Awesome Portfolio, I was building these portfolios with options and international stocks and EM local currency debt and all this exotic stuff and I got something that returned about the same as the S&P but with a lot less volatility.
(00:55) And you don't have to be a financial expert to do that. You just have to invest in five simple things and you really get to the same place. [music] Welcome to Talking Billions. We talk about big ideas, big inspirations, [music] big topics. We take on the hardest topic of all, money. How to make it, save it, keep it.
(01:27) [HOST COMPLIANCE DISCLOSURE — not content] But our [music] conversations lead us to an even bigger question. What it means to live a rich life beyond money. My guests [music] share their practices, principles, and evergreen wisdom. I'm your host, Bogumil Baranowski, author, TEDx speaker, [music] and investment advisor to wealth creators with patient capital and an infinite investment horizon.
(01:48) I work with families and [music] individuals who aspire to grow wealth over a lifetime and generations through disciplined, thoughtful [music] investments in durable quality businesses while giving money meaning. Join me on this quest to unearth and share the wisdom of the ages. Let me share [music] with you the podcast program disclosure statement.
(02:08) Blue Infinitas Capital LLC [music] is a registered investment advisor and the opinions expressed by the firm's employees and podcast guests on the show are their own and do not reflect the opinions of Blue Infinitas Capital. All the statements [music] and opinions expressed are based upon information considered reliable, although it should not be relied [music] upon as such.
(02:28) Any statements or opinions are subject to change without notice. The information presented is for educational purposes only [music] and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise [music] stated are not guaranteed.
(02:45) The information expressed does not take into account your [music] specific situation or objectives and is not intended as recommendations appropriate [music] for any individual. Listeners are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation.
(03:07) Past performance is not indicative of future performance. None of what you're about to hear is investment advice. [END DISCLOSURE] [SPONSOR READ — Fiscal AI — not content] This episode is brought to you by Fiscal AI. Fiscal AI is a modern financial data provider for global equities. In addition to their web-based terminal, Fiscal is one of the leading data connectors for cloud ChatGPT and Gemini.
(03:29) With their self-serve API, you can get structured real-time data plugged directly into your AI of choice. That includes 20 years of financials, ratios, filings, transcripts, news, fund letters, and much more. And unlike other providers, their data updates within minutes of earnings reports, not days. Personally, I see Fiscal AI solving a real challenge.
(03:52) The sheer volume of new data coming in every day and the time it takes to find, analyze, and evaluate it. Being able to use your preferred AI platform with data whose source you actually know and trust makes a real difference in the research process. Whether you want a powerful out-of-the-box research terminal or a data plugin for your AI, you can use my link fiscal.ai/talkingbillions to get 15% off.
(04:18) Again, it's fiscal.ai/talkingbillions. The link will be in the show notes. [END SPONSOR READ] My guest today is Jared Dillian, former Lehman Brothers index arbitrage and ETF trader, founder of the 18-year-old professional market letter, The Daily Dirtnap, registered CTA, author of seven books, and an unusually multi-dimensional market thinker whose work joins macro trading, practical personal finance, risk control, writing, mental health, and electronic music.
(04:49) How are you? So nice to see you again. >> Hey, thanks. Appreciate it. I'm good. >> So, today we're talking about your new book, The Awesome Portfolio: A Simple, Stress-Free Approach to Investing. I'm super excited. I have a thousand questions. I'll mention for the benefit of the audience that you were on the show a year ago, so I highly recommend looking up that episode where we talked about many of the other books.
(05:13) I want to jump right in. I'm curious about the aha moment. A certain subscriber wrote to you and an innocent email exchange led to the book. Can you share the story? >> Yes. I've had the subscriber for many years. I used to work with him at Lehman and he moved out to Idaho and became a financial adviser and it's kind of an odd thing to be a financial adviser in Idaho.
(05:39) I think he does pretty well. But I don't remember how we got in the subject but basically we were trading models like different portfolios like, okay, this is what a 60/40 looks like and this is what it looks like if you had gold and it has the Sharpe and the Sortino and all that stuff and this is what happens if you had real estate, and after we did a couple of iterations of this we ended up with what the Awesome Portfolio was and I was like that's the aha moment. That's it.
(06:13) It's basically, towards the end of the book, in the last couple pages I talk about Nick Maggiulli's work. He did a linear optimization to find actually what the optimal portfolio was in terms of the most efficient use of risk and with the exception of cash it's basically the Awesome Portfolio. It's got a much higher Sharpe than the S&P 500, the drawdowns are minimal, and my philosophy going back really going back to 2008 has been to minimize volatility, right? Because in 2008 I experienced the crash.
(06:58) I worked at Lehman, I had a bunch of Lehman stock that went to zero and I basically took a 50% drawdown of my own net worth and I said I never want to do that again, right? So basically my trading, all my work since then has revolved around not so much being a hedge fund but really working hard especially to minimize drawdowns but also to have an efficient use of risk.
(07:27) So, one of the things I talk about in the book is, up until 2019 when I discovered the Awesome Portfolio, I was building these portfolios with options and international stocks and EM local currency debt and all this exotic stuff and I got something that returned about the same as the S&P but with a lot less volatility.
(07:51) And you don't have to be a financial expert to do that. You just have to invest in five simple things and you really get to the same place. So >> it's fascinating. You're touching on so many things. Nick Maggiulli was on the show. I really enjoyed his writing in both his books. Just Keep Buying and The Wealth Ladder.
(08:12) I feel like they give me a certain framework, and I'm sure other people as well, to think about investing over a lifetime on one hand and then growing wealth over a lifetime on the other hand, how you need the different setups to move up the ladder. Anyways, Nick does a better job explaining it. You bring up volatility. I manage money for wealthy families.
(08:29) I've been doing it for 20 years. I've been told and I believe to some extent that volatility is not risk. I get that. But volatility has an impact on our behavior. I want to go back a little bit to that time you talk about. You've been watching investors over the years. They make mistakes and volatility gets in the way of smart investing.
(08:49) Can you explain how that works? And in the book, you have those quotes about even index funds, sharing how people are not holding those ETFs through the tough times. So the outcomes are suboptimal because of behavior that gets in the way. It's a good product, but it's used not the way one would think. >> Yes.
(09:10) I mean, if you go to the Vanguard website and if you look up the one-year, three-year, five-year, ten-year returns of the S&P 500, they're amazing, just absolutely amazing. >> The thing is that nobody realizes those returns. So, when I say nobody, I mean practically nobody. Maybe a couple people do.
(09:29) The reason is because of behavior. And the reason for that is because of volatility, right? So imagine this imaginary fund, ETF, that gave you 11% annually with no volatility, right? Basically just like a bank account, right? Well, that is impossible to screw up, right? If you're not experiencing volatility, you're not going to sell it. It just grows.
(09:56) So that's the ideal situation. You have ups and downs. When you have ups and downs, you experience emotions, right? So, you're happy, you're sad, you're happy, you're sad, and eventually you get to the point you might get really sad and you might liquidate your holdings, which is the worst thing to do because then you stop compounding, right? And then of course the market recovers the high watermark and it puts in new highs and then you feel good again and then you invest on the highs and then that's the highs and then it goes down. So
(10:27) the purpose of volatility is to make people make stupid decisions, right? And the thing with the S&P 500 is it's an unbeatable index. It has been unbeatable. But when you invest in an index, you get the returns of the index which are very good. But you also get the volatility of the index.
(10:51) And the S&P 500 is a very volatile index. Generally it's about 16 vol, which means it moves about 1% a day. And in the United States, this is like no other country does this, but we put our entire life savings into something that moves around 1% a day. And in bad times, let's say last spring during the tariff tantrum, it was moving around eight or nine% a day, right? Nobody else in the world does this.
(11:22) The Europeans don't do it. The Japanese don't do it. This is something new. We haven't been doing this for the last 100 years. This really started in the late 1990s. This is when people first started to discover index funds. In the late 1990s, 2% of AUM was index. Now it's 56%. >> Right? Vanguard discovered that their customers were not realizing the advertised returns in their funds.
(11:56) Okay, they knew that people were actively trading their funds, which they really can't do anything about. But what they did was they discovered that if you added a third party, a financial adviser or somebody like that, they created what was called advisor alpha, right? And what that meant was if you just had somebody as sort of a referee to just point at you and say stop trading your funds and buy and hold, then people's returns increased by 3%.
(12:29) They measured this, right? >> So a lot of people say to me with the Awesome Portfolio, well, why don't you just invest in index funds and have an advisor to tell you not to do anything stupid? And the reason is — and I'll tell you my reason. The reason is even if you have an advisor, if you take a 50% drawdown, you're still going to be stressed.
(12:52) You're still going to be stressed. You're still going to feel those negative emotions. With the Awesome Portfolio, you never do. >> Worst drawdown in the history of the Awesome Portfolio, 12%. The second worst, 9%, which was the year of the financial crisis. The third, fourth and fifth worst, 1%. It rarely has a drawdown.
(13:16) Drawdowns affect psychology. This is why we have the hedge fund industry, right? This is why we have professional money management. You have places like Millennium and Exodus Point and Balyasny where the drawdowns, if you have them at all, are very very small and they give you this thing that returns — these pod shops, these multi-strategy firms don't really beat the index by all that much.
(13:43) Sometimes they don't, but what they offer is not much in the way of drawdowns, right? Because that affects your psychology. >> It's such a powerful revelation and we'll come back to how you structure the Awesome Portfolio. What you're talking about is a return that's below the market, the index, but a return that comes with a lot less volatility.
(14:04) And we'll come back to it. I'm curious because you highlighted that we have more volatility. Do you — I'm sure there are many reasons, but do you think part of it is because we have so much money invested in passive funds that we have more volatility? I see it at an individual stock level. Those dramatic sell-offs.
(14:23) It's almost as if somebody, or nobody, paid attention until the earnings and then the earnings appear and the stock is down 30% and they're not small stocks and I take advantage of it because I own individual stocks. But I find it fascinating because I haven't seen that kind of a reaction too many times before in the early days of my career.
(14:45) I see it almost daily. It's as if so much money is passively invested that nobody's actually paying attention to individual stocks. >> Yeah, I would say volatility right now is probably about average. But correlation is very low. We have very low correlation right now. So what you're seeing is you have big moves in individual stocks, >> right? >> But it doesn't have a whole lot of effect on the index.
(15:10) >> Mm. >> And the interesting thing is the last time this happened was the dot-com bubble, is when correlation got very low. This regime that we're living in right now, there's differences but it does have a lot in common with the dot-com bubble. And I'm not saying this to be a perma bear or anything. I'm not saying that the market's going to crash, but this feature of high single stock volatility with low correlation, we've had this in the past.
(15:42) >> I like what I'm hearing. I find it fascinating how the market evolves and changes over time. The point that you're making is that people might be in a position to buy the right thing, but it's really really hard to hold. A lot of the studies you quoted, and I think even Peter Lynch had an incredible record and great books that people talk about.
(16:02) He also shared in one of his books that the average shareholder in the fund did not have the returns of the fund because people — >> the Magellan Fund. Yes, >> the Magellan Fund. Right. >> He returned, I want to say, 29% annually for a period of like 10 or 15 years and the average shareholder did much much worse because they traded his fund. Yes.
(16:24) >> I don't remember but I thought it was single digits. Somebody can look it up. I'll look it up. But I thought it was actually embarrassingly low, which shows you how hard it is to hold on even to a successful strategy that worked really well for a long period of time.
(16:42) You share so many concepts in the book. One of them that really stood out to me, you call it the life hedge, and you have those charts that show how we travel through life, both on the income side, the asset, wealth, and the happiness. What is a life hedge and how can we use it in our life? >> Well, I think actually that's the most important chapter in the book.
(17:03) So, I've spent a lot of time thinking about this. You have a job. Let's say — in the book I talk about the nozzle factory. You're working at Nozzles, Inc. >> and you work at this company and things are good. Company is earning more revenue and you're getting paid more. You're getting raises and you're getting stock and you're getting promoted and times are good.
(17:27) And not coincidentally, things are good in the overall economy. So the stock market is also going up. So you're investing in stocks. You're doing well at your job and the stock market is going up. So you're getting richer and richer and richer. And then you discover correlation, right? So then we start to enter a downturn.
(17:46) The economic data gets worse. Revenues at the nozzle company start going down. Stock market's down 10, 20, 30%. Sales drop off. Next thing you know, you get laid off. Times are tough, you want to sell your stocks, but now the market is down 30, 40, 50%. So, what you essentially did by investing in the stock market is you made your life just more procyclical, right? You increased the volatility of your life because if you're doing well in your job, there's a good chance the stock market is doing well and vice versa. If
(18:23) you're doing poorly, there's a good chance the stock market is doing poorly. So the amplitude of these waves in your life just gets really really big. So I've always thought that the perfect investment would be something that goes up over time but was negatively correlated to your life.
(18:42) So when your life was good, your investments were actually doing poorly. And when your life was bad, your investments were doing well and it would cancel each other out over time and you'd have something like this straight line growth. There's nothing in the world that does that. Gold maybe comes the closest, but there's nothing in the world that's negatively correlated to the economy that grows over time.
(19:07) The closest thing is really the Awesome Portfolio, right? That's the closest thing. So, >> and we'll come back to it and we'll share with the audience how you built that portfolio in a second. But I want to ask you, you have this chart. You say you can be rich, you can be happy, but you want to be both rich and happy.
(19:26) And it goes back to that volatility. Somehow it really spoke to me because we all think, "No, I want to be rich. No, I want to be happy." You're telling people there is a way to be both, but it's a different path. I found it really eye opening. You talk about the risk of ruin which really resonates with me. I manage money for families.
(19:46) They're wealthy, comfortable, and the last thing they want is to start all over again with nothing. But when people get into investing, they think about the upside, how can I grow it? They don't really think about the risk of ruin. Can you explain why it's so important to think about it even for a minute? Why you don't want to experience it again and how we can avoid it? >> Well, in particular, the way I would answer your question is, I would say wealthy people think about the risk of ruin and middle class people don't.
(20:17) Wealthy people are very careful with their wealth and middle class people are very careless with their wealth, right? So, let me give you an example. Let's say you played the Powerball and you won the jackpot and you had 300 million, right? Would you take $300 million and put it all in SPY? Would you just put it all in the S&P 500? Now if you did that, over time you would be a billionaire.
(20:45) You would probably end up with billions of dollars, but nobody does that. What they do is they take it and put it in T-bills and they get 4.5% a year and they live off 13.5 million a year. They want to preserve that money, right? Whereas somebody who works at the nozzle factory who has 400,000 in his 401k, he's not too concerned with the risk of ruin, right? He wants to grow it to 800, 1.6, 3.2, etc.
(21:16) He wants to double and triple. And I just find that — I don't want to say working stiffs, but somebody who's a W2 employee who has a 401k, takes a lot of risk and does not think about the risk of ruin at all. Now people were thinking about it 2010, 2011, 2012 when the financial crisis was still pretty fresh in people's memory.
(21:46) But coming up on 20 years later people have totally forgotten, right? So that's part of the problem. >> It's such a helpful framework to have, to find ways to avoid ruin and take advantage of what you have. Let me ask you this way. You mentioned in the book how you have this love-hate relationship with ETFs and the topic comes up on my show quite a bit.
(22:15) Some people are in favor, some people feel that they disturb the market. You've gone through this journey since 1997 of being a believer and now finding a more creative way to use them in your approach. Can you talk about that love-hate relationship? [laughter] I find it intriguing. >> Yeah.
(22:33) Well, I used to be an ETF trader, so I was getting high off my own supply. I was an ETF trader when there were only about 300 ETFs in existence, right? So back in the early days, ETFs are one of the best financial innovations of all time. Before — open-end mutual funds have shortcomings. Especially when you're talking about illiquid stuff like high yield bonds and stuff like that. I would actually make the argument that if let's say somebody came up with the idea of open-end mutual funds today, the SEC
(23:09) would probably not approve them. So open-end mutual funds have shortcomings, but the one nice thing about them is that you only get one price per day. You get the NAV at the end of the day and that's it. So, the difference between, let's say, Vanguard's S&P 500 mutual fund and VOO, right? The difference is the mutual fund, you're getting the NAV once per day. VOO,
(23:42) you can look at your phone every 5 seconds and see where it's trading throughout the day. And that's bad. That's bad. The more information you're getting on price, the more it affects your decision making and it causes you to do stupid things. So, even though ETFs have absolutely exploded and the asset management industry is hurting, I'm still a big fan of open-end mutual funds.
(24:10) And if I had the ability to implement the Awesome Portfolio using open-end funds, I would. But you can't because there's nothing that has gold. You could do real estate. You could do everything except for gold. But there's no open-end mutual fund for physical gold. So >> that's a fair point. I have to ask this, but back in the day, there was no easy way to invest in a benchmark.
(24:39) And I know that the ETFs that you talk about, they have much more than the benchmark S&P 500, but the minute you're able to invest in the benchmark, don't you think that the benchmark gets affected by it? >> What do you mean? I'm not sure. >> Well, if money is flowing, let's say more and more. So, I don't know what the number is.
(24:58) Some people say it's half, some people say it's 80%, that's passively or hugging the index kind of investing. If that happens, then stocks are being bought because they're in the index, not because they make sense or they're worth holding. So the benchmark that was supposed to be an independent way to observe a phenomenon, right? The market, >> you participate in the phenomenon.
(25:21) The observer and the observed get affected, like in physics. And I think we're watching and there will be books written about it, but I see that it has an impact, that the benchmark is not an independent entity. You can affect it by buying into the index. >> Yeah, I think the word you're looking for is reflexive. It's reflexive. >> Yes, that's the word. >> The top seven stocks make up 35% of the index.
(25:53) So if you want to buy the index, you have to proportionally buy the top seven stocks and they get bigger, which is one of the reasons that most large cap managers underperform. The only ones that are outperforming are the ones who disproportionately own the top seven stocks, which is insanity because if you own the top seven stocks in an even higher proportion, you're just a maniac, right? But those are the people who have beat the index over
(26:23) time. Michael Green obviously has done a lot more work on the flaws of indexing than I have. I kind of have a primitive understanding of it. But the other part of this which I'll say is, I invested in an index fund in 1997. Okay, back when indexing was 2% of AUM.
(26:50) Now that indexing is close to 60% of AUM — back then I remember when I was reading about index funds the one thing that I was consistently reading over and over again was it's instant diversification. You buy this mutual fund and you have 500 stocks, you're instantly diversified, right? Which was true. But when everybody does the same thing, they're all in the same trade. Right.
(27:16) Right. >> So the pandemic is a good example of this. I think what you saw during the pandemic when the market was down 35% was a mass liquidation of index funds, right? And it happened very quickly. So that's kind of the problem. When the whole world is in an index and there's some crisis, if you want liquidity, if you want to turn it into cash, there's 150 million people who are doing the same thing.
(27:51) So, >> it may create opportunities for those that are sitting on the sidelines. But yes, it's a good point that back in the day, you would think you have a diversified portfolio right off the bat. Right now, not so much. And actually, if you look at the themes that are dominating the market, it's even more concentrated than it seems.
(28:10) It's quite something. We'll see where it goes. Before I ask you about the five slices and why there are only five or why you decided the number, I want to ask you about the 60/40 portfolio. I'm sure this audience is familiar. A lot of studies, a lot of talk over the years about the 60/40 portfolio.
(28:29) You say that it's incomplete rather than wrong. Can you explain why and what are people missing focusing on just the 60/40 portfolio? >> Yeah, the 60/40 portfolio is pretty good. Honestly, it's not bad. It actually outperforms the Awesome Portfolio by a little bit, by about 40 basis points. And it's performed well at various points in history.
(28:55) During the Great Depression, from 1929 to 1932, stocks went down 89% but bonds were up 15%. So, if you had the 60/40 portfolio, it wasn't the end of the world, as compared to if you had all stocks. The problem with the 60/40 portfolio as people discovered in 2022 is that it's very interest rate sensitive, right? So if you have a period where interest rates are rising rapidly, that hurts stocks and it hurts bonds both at the same time.
(29:29) So the 60/40 portfolio got killed in 2022. It was down about 20%. And the reason is that you only own financial assets. You don't own real assets, right? So stocks and bonds are paper, but what you need in addition to paper is exposure to real things. So in particular, real estate and commodities.
(29:53) In order to be diversified — it's great if you're diversified across financial assets, but there's much more to the investing universe than just financial assets. There's commodities and real estate and other things, alternatives or whatever. So that's the point that I was trying to make. >> It's a fascinating point that even in those tough times that portfolio did okay.
(30:18) You're taking it to a whole new level. So let's talk about it. Five equal 20% slices. What are they? Why five? Why equal? >> Stocks, bonds, gold, cash, and real estate. And each 20%. And there's a whole bunch of points to make on all of it. I'll try to run through it really quick. Stocks is obvious. You want exposure to growth.
(30:44) Bonds is obvious. You want exposure to income. So that's basically your 60/40. Then you have gold. Well, when I was initially looking at the Awesome Portfolio, I wanted exposure to commodities. So I experimented with some of the commodity indices and the returns were not that great and basically the reason is it's not because commodities are terrible, it's because commodities have negative carry because you have to pay for storage generally.
(31:21) With gold that's a very small cost, but with other commodities that cost of storage — basically what you're referring to is in a futures curve you're looking at contango which is the cost of storage, so that can get really expensive. With gold it's very minimal and what I found was that gold mimics the commodity indices over time. The cost of carry is negligible and what it does is it gives you a lot of exposure to inflation whereas bonds and stocks, you have negative exposure to inflation, right? And real estate, real estate you also
(32:00) have exposure to inflation. Real estate is not as good as stocks. Stocks over the last 100 years have returned about 10%, real estate has returned about 5%. So it returns less. Now one of the things I talk about in the Awesome Portfolio is how to express the real estate part. And I say look, if you own a home, the equity in that house could be considered your real estate allocation.
(32:30) It's not ideal because it's one house in this idiosyncratic geographic area. Ideally you would have like a mutual fund that gives you some proportional interest in a bunch of houses all over the country, but that doesn't exist. But anyway, if you have a house, your equity in that could be your real estate exposure.
(32:54) If you don't have a house, then you can simply buy a REIT ETF, right? And REITs have apartments, offices, malls. They also have some other weird stuff like data centers and cell phone towers and stuff like that. But by and large, it's a pretty good proxy for all real estate. And the real estate indices have been around since 1972.
(33:17) So we have a lot of data on how they performed. And what's interesting is that when you add real estate to the rest of the Awesome Portfolio, the returns go up and the Sharpe goes up by quite a bit. So the addition of real estate to the portfolio really makes it a lot better because once again it's not super correlated with anything else.
(33:43) >> Curious if you had to drop one of the five, which one would you drop? >> I wouldn't. Well, we actually didn't talk about cash. I forgot to talk about cash. That's a separate question. But hey, >> yeah, we'll come back to cash. >> I wouldn't drop any of them.
(34:04) Listen, if you dropped real estate, then what you would have is Harry Browne's permanent portfolio, which is also good, right? Harry Browne ran for president as a libertarian. He came up with a permanent portfolio, which is stocks, bonds, gold, and cash, 25% each. And the Awesome Portfolio is a vast improvement over that in returns also and in risk.
(34:29) The permanent portfolio, I think it's still around. I think there's actually an open-end mutual fund. You can invest in the permanent portfolio. But it's a little bit of a dog. The returns are worse. So yeah, I don't think you can really — I can't answer that question.
(34:51) You really can't drop any of the classes from this. >> Yeah, that's a good point. So, let's talk about cash because I've been doing this for 20 years. There are people that believe that they can't have any cash in the portfolio. It's too much of a drag on returns. Then there are people that I know that comfortably hold 30, 35% almost at all times and different goals, different objectives, different stomachs.
(35:19) Why have cash from your perspective? >> So, first of all, I came up with the Awesome Portfolio back in like 18 or 19 and if you remember back then interest rates were zero and I was telling people they should have 20% in cash which was yielding zero and you would not believe the complaining that I got about this. Like, you're telling me I should have 20% of my money that yields nothing, and I'm like yes, actually you should, be doing that for two reasons.
(35:52) One, it's not going to yield nothing forever, right? And if you go back to the late 70s and you had the Awesome Portfolio, cash was your best performing asset class, right? Could happen. And even today, it yields 4%. So, it's not terrible. But the real reason to own cash is it's an opportunity to buy something cheaper in the future.
(36:19) It's optionality, right? So, let's say you went on a trip somewhere and you saw a house that you wanted to buy. Okay? Spur of the moment, you want to buy a house. You want to put down a down payment, $200,000. You don't have the cash. Well, now you're selling stocks and you have a tax liability or you're selling bonds and you have a tax liability.
(36:40) You're moving money around. You're trying to raise money to get this cash. Big pain in the butt. There is nothing more powerful in this world than liquidity, liquid net worth, the ability to just write a check and pay for something and not have to move money around. It's the most powerful thing in the world.
(37:02) Personally, I'm a little light on cash right now. I'm actually very light on cash right now because I have debt on my house and I'm very busy trying to pay off the mortgage. So, I don't have a lot of cash. I'm not comfortable with that. I would like to be in a position where I have 20% of my portfolio in cash.
(37:21) I would not feel bad about that at all. And going back a couple years, I did have 20% of my portfolio in cash. Not a problem. >> There's great value in having cash on the sidelines. And we talked about wealthy individuals. If you look closer, they all have [laughter] cash sitting — even for the peace of mind. Or if they're running a business and the business needs extra cash, they can dip in. Anyways, the cash has value.
(37:51) I want to ask you about gold. I am intrigued. I followed gold. I knew a lot of people that invested in mining stocks at different points in time. I have to make a confession that I had exposure, have exposure to gold over the years for various reasons. No recommendation to anybody listening, but I was impressed that you included gold because some people feel that it doesn't belong in the portfolio, it's archaic, it's a shiny rock, it doesn't have any income and on and on
(38:22) and on. You decided that gold belongs in the portfolio. Is this the life hedge kind of countercyclical asset that you see? >> It is. And like I said, it's got gearing to inflation. The pushback I usually get on gold is that I have too much of it. 20%. That's too big.
(38:44) And usually the people who tell me that are people who have 80% in stocks [laughter] and they don't see any problems with that. 80% stocks is totally fine, but 20% gold is way too much. So, [laughter] it's a choice. >> But yes, it's fascinating. In a world where everything seems to be correlated, I think we're desperately looking for something that maybe acts in a different way than the majority of the assets.
(39:15) >> Gold has a correlation of zero to stocks. Zero. And if you go back 25 years ago, it was actually negative, which made it even better. If you had something that was negative correlation to stocks, it was even better. But right now, it's zero, which is terrific. >> So, and I want to highlight something.
(39:36) There was a study, I'll look it up, that showed that on the days — we talked about the tariffs, this was even before the tariffs last year — when the markets drop, the correlation during the drops is much higher than it is on an average day. So people are selling everything sometimes for no reason.
(39:55) And these are the days when our convictions get tested. So having something that's not acting this way is helpful even on a behavioral, psychological level. I want to ask you about rebalancing. When people build portfolios like these over the years I've seen quarterly, monthly, annual. Tell me about how you decided how to rebalance this, once a year, not more often.
(40:18) >> I did not optimize it. I did not run a backtest and see what the optimal rebalancing period was. Maybe I should have. Once a year is — look, the whole goal here is simplicity, right? One of the attractions of investing in index funds is simplicity, right? Put all your money in the S&P 500, dollar cost average it and just buy and hold forever. People can understand that. It's very easy to understand. So I tried to make this as easy as possible. If I had
(40:56) backtested it and said well actually the optimal rebalancing period is 267 days, then that would get way too complicated and people wouldn't do it. So once a year is fine, right? And a lot can happen in a year. In 2025, gold went up a lot. It basically doubled.
(41:19) And you have to rebalance. It's kind of the one drawback of the Awesome Portfolio, that it's really the one thing that people can screw up, is that they can forget to rebalance. And you can make it on December 31st, you can make it on your birthday, you can make it on some day that's easy to remember, but you have to rebalance it once a year.
(41:41) >> Keeping it simple, easier, especially if it's a do-it-yourself kind of approach. I have no interest in crypto as an investor, but I have to ask, [laughter] you decided not to include crypto. I don't know why, but I'm curious. >> Well, there's actually a really good reason.
(42:03) So, when I first started working on the Awesome Portfolio seven years ago, I would present it to people and they would say, "Why don't you include crypto?" And I would say, "It's too volatile." And they would say, "Well, actually, it increases the Sharpe, right? Because the returns were so good." So, which was true.
(42:23) In 2019, if you included Bitcoin, it increased the Sharpe of the portfolio. And then I said, well, look, if you had six asset classes, if you had stocks, bonds, gold, cash, real estate, and Bitcoin, guess which one you're going to be staring at every day? You're going to be staring at the Bitcoin.
(42:41) Even if it was only 2% of the portfolio, you're just going to be staring at it all the time because it's so volatile, right? So, I said, just for the sake of simplicity, just exclude it. The whole purpose of this is to minimize stress, right? And if you include something that's like an 80-vol in the portfolio, it's going to increase your stress even if it's a tiny part of the portfolio.
(43:08) So I said just forget about it. >> Good point. Volatility and keeping it simple. I want to briefly come back to the worst year for the Awesome Portfolio, the worst year for the S&P 500. If you can remind us the numbers, and I have them written down somewhere if you need help finding them. But tell us about the gap that it actually buys for an investor psychologically.
(43:34) The worst for the portfolio that we talk about here and the S&P. >> So the worst year for the Awesome Portfolio was 2022. >> It was down 12%. Stocks, bonds, and gold were down and cash was up a lot because rates were going up and real estate did fine, right? That was the worst year, down 12%.
(44:00) I think the worst year for the S&P 500 was in the 1970s, but let's just take 2008 as an example because that year the S&P was down 38%. And also, this gets kind of lost in the annual numbers, you don't really see it, but the total drawdown from the summer of 2007 to March of 2009 was 57%. That was the total drawdown, right? So, the Awesome Portfolio, the max drawdown is 12%.
(44:32) The S&P 500, it's 89% if you go back to 1929. The drawdowns are very minimal. Really the only thing that hurts the Awesome Portfolio is rising interest rates. And it's funny because when I put this together 7 years ago, I knew that was the case. I said this is pretty much a bulletproof portfolio except if interest rates go up very quickly, it'll get hurt.
(45:00) And that's exactly what happened. But still 12% — if you can live with a 12% drawdown that's not terrible. >> You're in a game of your own. It's your own game here because even the drawdowns are not really in sync with the S&P 500, right? So you can't be really comparing yourself year to year to the S&P 500 because you're on a completely different journey. Which leads me to a question that I see people experience: fear of missing out. The market is up this much and the investor is not up that much. Not only the drawdowns,
(45:37) but the times when you're falling behind. You dedicated a chapter to that. How does one make it through a raging bull market that's running away from you? [laughter] You're sitting on your five slices that make sense, but you're not keeping up. >> Yeah. If there's a psychological shortcoming to the Awesome Portfolio, that is it, right? FOMO, fear of missing out. So I created a couple tables in the book. I said look, here are all the
(46:11) years where you're underperforming the S&P 500 by 10% or more, and it's a lot. There's quite a few years when you're underperforming the S&P by 10% or more, right? And then I said, "Here are the years where you're outperforming the S&P by 10% or more." And inevitably it's all the big crashes, right? So 2008, 2000, 1973, all the big crashes, you're massively outperforming the S&P.
(46:40) So really what I just tell people is look, you're going to go to cocktail parties. People are going to be bragging about their stocks, and you're going to feel terrible because you're up 8% and they're up 22%. And I'm like, you are just on your own path and you have to stick with the plan and one of these days it's going to hit the fan and you will be very happy you have what you have.
(47:06) >> So I'm all for it. Somehow the feeling is different when the market is up a lot and you're up less than when the market is down a lot and you're down less. It's like being smart together, being dumb together. I don't know. There's something [laughter] about it, that the feeling is different. Like I feel really dumb right now.
(47:23) And then you feel you should feel so much smarter than everybody else. But somehow it's not enough. It doesn't compensate. I don't know if somebody did the emotional quotient here and explained it, but somehow it doesn't feel the same. You talked about the interest rates going up. Is there any scenario that keeps you up at night when the five correlate together, the five just don't work?
(47:46) Something that keeps you up at night even with a portfolio like this, an Awesome Portfolio. >> I have thought about this. You would be shocked at how much time I've spent thinking about this. Like what is the vulnerability? Is there any scenario in the world where everything goes to hell at the same time? I cannot think of it.
(48:07) Maybe I just don't have a big enough imagination. But I cannot think of a scenario. The worst, like I said, the one threat is rising interest rates. But look, let's say there's a war or a nuclear — let's say there's a nuclear war. Stocks will go down a lot. Bonds will go up. Gold will go up. Real estate will probably go down.
(48:28) You can think of any natural or man-made disaster and inevitably one part or two parts of the portfolio are going to be working. >> Mhm. >> So >> that's a good point. I want to ask a closing overarching question. I've been watching the markets for decades, writing about it for decades.
(48:51) What's the one conviction belief that you hold deeply and strongly that most people would disagree with? Professionals, investors, however you want to take it, but you believe it. And most people would say, "Jared, I think you're nuts." >> I can't think of anything for now, but honestly, it's — look, let me just tell you something about the publishing industry, right? Books succeed when they tell people things they already believe. Right.
(49:27) >> Interesting. Yeah. >> So there's a book called The Millionaire Next Door. You're probably familiar with that one, right? >> Of course. >> And The Millionaire Next Door said, look, if you want to be a millionaire, then you have to eat canned pork and beans and you have to have one cheap suit and you have to have a beater car and live in a 1,200 square foot house and you basically have to be incredibly cheap and just undergo all this austerity and you'll have a seven figure bank account, right? And everyone was like,
(49:54) >> "Yeah, I already believe that." That's how I thought you get to be a millionaire. It confirmed my beliefs. This is a great book. I'm going to tell all my friends about it. Right? >> This is going to cause a lot of cognitive dissonance, right? >> This, I hate to say it, it's probably not going to be a best-selling book, because what people believe now is that they just put all their money in index funds and dollar cost average and buy and hold, right? And it is going
(50:24) to take a lot to disabuse people of that notion, right? I think the book is an airtight case. I don't think you can read this book — if you're paying attention, I don't think you can read this book and come to any other conclusion than that this is the right way to invest. Right? And if you do come to another conclusion, if you say, "No, I like my index funds.
(50:47) I'm just going to ride out the volatility." Knock yourself out. Right? But this is the better way. >> You know, volatility is something that we can ignore until it's in our face. And I see it time and time again [laughter] and I exchange emails with so many listeners and they tell me what they do and it's fascinating.
(51:06) If it works for you, it works for you. I tell them, more power to you. Hold the things that you can hold. If you can believe and you can hold it, whether it's one index, all your money in it, as you pointed out the example with the lottery winner, good for you.
(51:20) But what you're proposing in this book, just to sum it all up, less volatility, lower returns than the S&P 500. But I think at the end of the day, what you're saying is you could be happier holding it. You'll be still richer and just enjoy the ride in a much better way than holding on to a highly volatile — >> So, not that the ETFs are good or bad.
(51:43) There's a certain way to approach them. Yours is one of many. Everybody listening, do your own research. See what works for you. But I think it's a thought-provoking, wonderful book that opened my eyes to a different way of thinking about it. You took it to a whole new level beyond the 60/40 portfolio, beyond what other people proposed.
(52:01) So, I'm grateful you wrote it. I'm very happy we got to talk about it. Jared, thank you so much. So much fun to have you on the show. Keep on writing. I'm looking forward to the next one. >> There's a next one coming out next year, so we can talk then. >> Can you share what it is? >> Yeah, it's called Super Investors, the 20 traits of successful investors.
(52:22) >> Love it. >> Yeah, >> that's a good title. >> Yeah, >> thank you so much for today. What a joy. >> Thank you. >> [SPONSOR READ — Fiscal AI — not content] Before you go, just a quick reminder, if you want to check out Fiscal AI and see how it can upgrade your research process, subscribe using the link in the show notes to get a free trial plus 15% off. [END SPONSOR READ]
(52:43) You [music] are listening to Talking Billions. We talk about big ideas, big inspirations, big topics. We take on the hardest subject of all, money. But our conversations [music] lead us to an even bigger question, what it means to live a rich life beyond money. If you enjoyed the show, please take a moment [music] and follow, subscribe, rate, and share with friends and family.
(53:06) We rely on word of mouth to promote the show. One click [music] for you means the world to us. Thank you. Until next time, your host, Bogumil Baranowski. >> [music]