Title: All-In on the S&P 500 Worked for 18 Years | Jared Dillian on Why It's Still Wrong
Show: Excess Returns
Guest: Jared Dillian (The Daily Dirtnap / Jared Dillian Money; author, The Awesome Portfolio)
Date: 2026-09-08
URL: https://youtu.be/PiWdnJAJ7Jc
Length: 56:39
Note: Verbatim YouTube auto-transcript, cleaned. Verbal fillers (um/uh/you know/like as a tic/I mean),
stutters and false starts removed; wording otherwise verbatim and no content reordered, paraphrased or added.
ASR mangles corrected to the intended names: "Daily Dirtnapping"/"Daily Dirt app" = The Daily Dirtnap;
"DJ Stchicking" = DJ'ing; "Austin portfolio" = Awesome Portfolio; "Charlie Mer" = Charlie Munger;
"Harry Brown" = Harry Browne; "CAT" = cash; "sharp ratio" = Sharpe ratio; "6040" = 60/40;
"non-stationerity" = non-stationarity; "Jack Reigns" = Jack Raines; "jaredillianmoney.com" =
jareddillianmoney.com; "pro-yclical" = procyclical; "counteryclical" = countercyclical;
"an 80 asset" = an 80-vol asset; "spaxs" = SPACs; "Merryill" = Merrill. "Nozzles Inc." is Dillian's
invented example company. Timestamps are as delivered by YouTube.

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(00:02) You're watching Excess Returns, a channel that makes complex investing ideas simple enough to actually use where better questions lead to better decisions. Who's with me today? Well, we've got, let's see, from Lehman to The Daily Dirtnap to DJ'ing with 18 books, four billion blog posts along the way.
(00:24) Here to discuss the newest book and what we can apply from it even today in these wacky markets. It's the Awesome Portfolio author himself. Hold it up, Mr. Jared Dillian. >> Yes. Yes. I have the same birthday as Ed McMahon, so I can go. Yes. >> It is your birthright, your god-given birthright, sir, to Ed McMahon. So, it's a great book. I'm just gonna start.
(00:51) I want to start here. This is a great book. This is one of the better portfolio books that I think has come out in a while. I'm not saying the psychology of money and those things sort of took us all in this other direction, but this is a really really good portfolio book. Do you realize what you did with this? >> I really don't actually.
(01:13) It's funny because when No Worries came out, god I did a billion podcasts and maybe maybe not a billion but I did like 75. It was a lot and >> 75 is a billion in podcast years. It's like a dog ear conversion. You just got >> So I got a lot of feedback on the book. I haven't done as many podcasts this time.
(01:37) Not that many people have read it. I really don't know. I don't have a lot of feedback on it. I mean people tell me it's good but I don't know. >> You said something obvious with a bunch of nuance footnotes and everything in between. So we're going to get into this but let me start you here because we've talked a lot about these things.
(01:58) There's other episodes. Go look up our back episodes on this stuff. 27 Years on Wall Street. Dot-com crash, financial crisis, pandemic selloff. And this is not a book that is here's how to pick better stocks. This is a book about how most people approach investing right now is not wrong but broken. Explain why this book needs to be out there.
(02:23) >> Actually I would disagree with you. I don't think what's going on now is broken. I think it's wrong. I think it's two different things. So >> okay, let's do it. So what people have been doing has worked for the last 20 years or 18 years. It has absolutely worked. People need things to be simple.
(02:46) They have a desire for simplicity. And if you give them very simple instructions, if you say put all your money in the S&P 500, dollar cost average it, hold it forever, that's very easy for people to understand, right? And they've done that for the last 20 years and the results have been fantastic and I do think there's some reflexivity there.
(03:10) I think it has worked because people are doing it, right, for sure. But it's wrong. And the reason it's wrong is, and maybe I'm just more conservative, but I don't want to trust my entire life savings to the stock market. This is kind of new in history. This wasn't happening in the 50s, 60s, 70s, even the 20s.
(03:37) Where people put their entire life savings and trusted it to the stock market and said look it's returned 10% for the last 100 years. It's going to return 10% for the next 100 years. And even if that happens, when you invest in an index, you get the volatility of the index, which can be really unpleasant.
(04:00) Even on an average day, the S&P moves a percent. Which is a lot. For your life, let's say your life savings was $600,000. Something that goes up and down $6,000 is quite a bit of volatility. So the rest of the world looks at us and thinks we're nuts. That Americans do this.
(04:22) They put all their money in stocks. They don't do it in Europe. Mostly they invest in bonds or in the bank. Japan, Japan has started reinvesting in stocks recently, but they avoided it for a number of years. We are crazy gamblers. We take huge amounts of risk. And the problem is that even if stocks go up 10% in perpetuity, you're going to get some big bumps along the way, which is going to happen, which affects your psychology, which is going to cause you to do suboptimal things.
(04:56) That's the problem, right? The quote I have here is volatility is the enemy. I love this quote, by the way. Volatility is the enemy. The purpose of volatility is to make people make stupid decisions. >> Yes. The idea that the volatility forces errors of judgment on the market participants, that's part of the problem here, right? That's part of the problem that people are trying to figure out, or should be trying to figure out a way to deal with, that you're trying to help with the book.
(05:29) >> Yeah. It's that I want to prevent the errors of judgment, but even to the extent that people don't make errors in judgment, I want to prevent unhappiness, right? Because if you're just longing the S&P 500 and you get a 20% drawdown, you're going to be miserable. It's going to cause you stress.
(05:52) You're going to be thinking about it. You had $600,000. Now you have $480,000. If you lost $120,000, which is a lot of money for even somebody who's upper middle class, you're going to be thinking about it and you're going to be miserable until you get back to the high water mark, right? So, you're going to spend x amount of your time over a 40-year investing career miserable, right? Doesn't have to be that way.
(06:22) Awesome Portfolio, very minimal drawdowns, half the volatility of the stock market. It doesn't have to be that way at all. >> Let's define it. Let's define it and then I want to throw out another piece of stats. Define exactly what the Awesome Portfolio is. This showed up in a prior book, but now you've dedicated a whole book to this topic.
(06:40) Explain. >> Yes. So, it's 20% each in stocks, bonds, gold, cash, and real estate. That's all it is. Why? Why is it not the permanent portfolio? >> Okay, so this is funny. Somebody was already like I'm going to hear a lot about this when the book comes out. Like you're ripping off the permanent portfolio.
(07:09) First of all, when I came up with this, I barely even knew about the existence of the permanent portfolio. The difference between the two is the addition of real estate. So Harry Browne, libertarian candidate for president, came up with a permanent portfolio, which is fantastic. It's 25% stocks, gold, bonds, and cash. Awesome Portfolio adds real estate and it is a major improvement, excuse me, to the permanent portfolio.
(07:40) The Sharpe ratio goes way up, the returns go up, the volatility comes down. Real estate does some very magical things because real estate doesn't have a lot of volatility. It doesn't return as much as stocks, but the returns tend to be pretty steady. It has very good risk reducing characteristics. It's not correlated to a lot.
(08:03) So that was a big improvement in the permanent portfolio. My favorite part about this with the financial planning hat on too is most people have real estate. They don't ever think about it as part of their balance sheet or part of their investment portfolio. >> Yeah. >> And you kind of address that too.
(08:19) And it is. >> Yeah. And the other thing is that most people are overinvested in real estate relative to the other asset classes. So if you're a middle class person and you have a $400,000 house and let's say you have 40% equity in the house. So you have $160,000 that is invested in real estate. Now, it's one house.
(08:45) It's very idiosyncratic in one geographic area, but you do have $160,000 in real estate. That person probably has 50, 80 grand in stocks, maybe 20 or 30 grand in cash in a bank account, probably no bonds, and probably no gold either. So the goal here is for most people they're going to have to bring up their allocation to these other asset classes so they get equal across the board.
(09:17) It's an interesting piece of nuance that I think carries over. This is why it's great. A simple idea in the book that expands very naturally over most of our lives. So another observation that you had that I think was awesome. Checking your portfolio. Awesome. You see what I did there? I'm just working. [laughter] It's effortless like a ninja turtle.
(09:35) Checking your portfolio every day means you get bad news roughly 48% of the time. Crazy on the 48% just to even think about it. But if you check once a year, it already drops to 26%. Talk me through that, what it means with the Awesome Portfolio too. Yeah. So if you have an asset that is volatile, the more volatile it is, the more you're going to be checking the price.
(10:02) If you remember Bitcoin back in 2017 or 2020, Bitcoin, gosh, in 2021 it ripped from 10,000 to 40,000 in the span of a month or two, right? I had Bitcoin at the time. You know how often I was checking it? Every 5 minutes. Something that is volatile you have to check the price all the time, right? Something that is not volatile like a bank account you don't check at all, or maybe bonds or maybe dividend paying stocks, you don't look at those all the time.
(10:41) So if you check the price of your portfolio, if you check your balance, if you do it every day, 48% of the time you're going to feel sad, right? So you want something that is not that volatile so you don't check it, because when you check it you get sad and then you might do something dumb. Right. That's the problem. Okay.
(11:02) >> Discuss this little idea too about infinity or zero. Do you know what I'm talking about? >> Yes. >> I love this metaphor. >> Yeah. So this is, I kind of started with Bitcoin but it applies to stocks too. You have these people who own these assets, whether it's stocks or crypto or whatever, and they're like, I'm never going to sell.
(11:27) And I'm like, okay, well, just philosophically, if you think about this, all stocks eventually go to zero. All of them. They all go to zero. The goal is to sell them at some point before they go to zero. Apple will go to zero someday, maybe 200 years from now, but it will go to zero someday.
(11:52) So there is a level at which everything should be sold. There is a price at which something should be sold. You don't want to hold anything forever. So that's infinity or zero. People are like I'm either going to sell it at infinity which is undefined or it goes to zero. And that's the mentality of a lot of investors today.
(12:14) This doesn't really pertain to the Awesome Portfolio, except in rebalancing, but yes, you do have to sell stuff. >> Well, and in the rebalancing context, and granted you can take it into trading context too. It's a Brent Donnelly expression that you've also adopted here of the cheer hedge.
(12:32) Explain the cheer hedge. >> Yes. The cheer hedge is when you own a stock and it's ripping and it's making a lot of money and you high-five the guy next to you. And when you do that, that is the moment at which you should sell the stock. Or if you go to a cocktail party and you start bragging about this stock, about how awesome it is, and you made 50 grand on this stock or whatever, you should go home and sell the stock.
(12:58) That is the time to sell the stock. Basically, the time to sell anything is when you feel the best about it. The time to buy something is when you feel the worst about it. So this is generally what I do in my life investing. It's the times when I don't have that level of introspection and I'm not thinking about my own thinking and I'm not thinking, gosh, I'm really happy about this trade.
(13:31) Most of the time, if I'm really happy about a trade, I just turn around and I sell it or hedge it or do something. It's interesting because it's a psychological boundary on top of the actual frameworks, right? That's what you're saying. You have to provide. >> Yeah. >> Another thing that you said inside of this topic was if you are the type of person who can't admit that they are wrong, you're going to have a very short career in investing.
(13:57) What is it about admitting you're wrong? Well, a lot of that is, this would be a good discussion for my next book, Super Investors. It's coming out next year. This is about discipline, right? But discipline is like doing push-ups or dieting or running or things like that.
(14:21) That's what I think of as discipline. I don't really think of cutting losses as discipline, right? Because it's emotional. It requires introspection and you have to admit to yourself that you're wrong. Right? So, I've been in the newsletter for 18 years, okay? Newsletter business, and I have trade ideas in the newsletter business and I trade those ideas myself.
(14:52) Right? So, think of how hard it is for me if I'm losing money in a position and I want to sell it. Not only do I have to admit to myself that I'm wrong, I have to admit to 4,000 people that I'm wrong, right? Most people can't do that. They can't do that. They can be wrong privately, but to be wrong publicly is just a nightmare, right? Very, very hard to do.
(15:19) Another idea that you introduce and this one is very very high and just a fundamental obvious thing that most people don't look at is how your income and your investments often march in the same direction and you introduce this idea of the life hedge. Unpack that one. I think the life hedge is the most important chapter of the book.
(15:42) I came up with that idea about 5 years ago, four years ago in the newsletter and basically the idea of the life hedge is that your stock portfolio or your investments are positively correlated to your life. Right? So the example I used in the book is some guy that works at the Nozzle factory or Nozzles Inc.
(16:06) right? So things are good. He's getting promoted. He's getting paid. He's moving up at the nozzle factory and he's taking his paycheck and he's investing in stocks and not coincidentally the stock market is going up because the economy is expanding and the nozzle business is doing well and the economy is expanding. So his stock portfolio is going up and this continues for a long time and everything's getting awesome and just when it gets really awesome then some negative economic data comes out, there's some unemployment and
(16:36) stocks start to go down and then he starts hearing about layoffs at his firm and then he actually does get laid off and now he needs the money so he goes to sell his stocks but the stocks are down 30% so he can't sell them there so he doesn't, then they're down 50%. So basically everything was awesome at the same time and everything was terrible at the same time.
(17:01) So by investing only in stocks you make your life more procyclical, right? Your stock portfolio is correlated to your life. So what I came up with is the idea of the life hedge which is some imaginary investment that is countercyclical. It does poorly when your life is going well and it does well when your life is going poorly.
(17:27) That would be the ideal investment, right? Because then you would get straight line growth, right? So that investment doesn't exist. The closest thing that you can get is the Awesome Portfolio. Very valuable. I know Meb Faber, some other people have talked about this too. For example, if you work in the financial industry, you probably shouldn't have everything in stocks because at the same time, your career might go off the rails.
(17:52) So will your portfolio. So are your chances to do anything with these skills. You have to think this way. Yeah. And also, this is a sad story, but when I worked at Lehman, [clears throat] if you wanted to buy Lehman stock, they would offer you a 10% discount. So, a lot of employees were like, "Oh my god, free money, 10% discount on the stock.
(18:13) " So, they worked at Lehman. They were paid by Lehman and they loaded up on Lehman stock in addition to the stock they were getting with their bonuses and then everything went to zero. It's freaking brutal. Too many stories of people doing that when I was at Merrill, too. It just hurts. >> Yeah.
(18:32) A great mungerism that you had some push back on. Munger says, "If you can't stomach 50% declines in your investment, you will get the mediocre returns you deserve." You said, "I had a 50% drawdown at one point in my life, and it sucked pretty bad. It was freaking terrible, and I vowed never to let it happen again." [laughter] Go ahead, throw a punch at Munger.
(18:50) Explain your point. >> Well, the other thing about Charlie Munger is he was a billionaire. He was a multi-billionaire. So, if he had a 50% drawdown, he was still a billionaire. So easy for him to say, right? So, mediocre returns. What's mediocre? Right? I don't like, the Awesome Portfolio.
(19:13) I wouldn't call it mediocre returns. It returns 9%. Which is actually pretty great. I think look, a lot of this comes down to risk tolerance. I worked on the equities floor of a bank, right? And what I saw caused me not to want to invest in stocks, or at least 80% of my portfolio in stocks.
(19:39) I'm okay with 20% in stocks. I use the quote in the book, 80% of chicken inspectors no longer eat chicken, right? Once you see how the sausage is made, it's frightening. So, yeah, I don't think you have to look, Netflix has had a couple of 75% drawdowns.
(20:06) Nvidia has had a couple of 75% drawdowns. I just disagree with Munger fundamentally. Drawdowns are the enemy. If I take a 75% drawdown in something, I'm waving the white flag. I surrender. That's it. I'm not buying more, down 75%. So I just don't understand that mentality at all.
(20:28) >> You explain this as not just thinking about risk but thinking in terms of the unit of risk, return for the unit of risk, and we can get into all the CFA terms and whatever on this if you want, we don't have to. Why is it important to think about risk adjusted in this light? So people today focus on returns to the exclusion of all else, right? Which is why Bitcoin was so popular because it was going up 10,000% or whatever and people said, "Oh, I can make 10,000%.
(21:02) " Without really thinking about the risk and that it was an 80-vol asset and it had this breathtaking volatility. So what people should really think about instead of thinking about what returns they want and then backing out the risk, they should think about what risks they want and then back out the returns, right? It should work in the opposite direction.
(21:24) So the thing about the Awesome Portfolio is that it is the most efficient use of risk of any linear combination of portfolios. It is the most efficient use of risk. You are getting the greatest return per unit risk. CFA term, it has the highest Sharpe basically of any portfolio. Some people might be surprised to know, I don't know if it was an interesting sentence.
(21:51) Let's just say in a Jared Dillian book about opening your first Vanguard account in 1997. Index funds. What do you think about index funds? What did you think in 97 and what are you thinking now? Well, in 1997, the way index funds were marketed was instant diversification, right? So, you basically click a button or mail in a check.
(22:16) Back then, you mailed in checks and you get exposure to 500 stocks. You are massively diversified just on one transaction, right? But the problem is that since indexing has become so popular and now, back in 97 indexing was 2% of AUM, now it's close to 60%. There's 150 million people doing the same thing. And basically I really don't want to get into the whole Michael Green thing here and all that stuff, but if you're in the same trade with 150 million people and everybody pulls the rip cord at the same
(22:55) time, basically what happens is what we saw in the pandemic, right? That's what happens. You had a 35% drawdown in a month. That's what can happen when everybody liquidates their index funds at the same time. That's the only time we've really seen that, right? It didn't happen in 2022, but you can have a liquidity stampede very quickly when everybody is in the same trade.
(23:23) >> How do you think about it in terms of index concentration? Is that just removing the diversification benefit you were seeing in 97 now too? Yeah, I mean we're at levels of concentration we haven't, I mean look, people have been passing around charts for a number of months now about concentration.
(23:45) Anytime concentration gets to these levels it's usually at or near a top. I'm not going to make any stock market forecasts on this podcast. But I was actually looking at the S&P weightings yesterday and sure, 45% is in the top 10 stocks, and they're pretty much all tech stocks.
(24:08) So the S&P 500 has turned into really, it's like a tech index. If you want an index that's not tech, you have to look at the equal weight S&P or the midcap or something like that. So yeah, and the NASDAQ obviously is like a super tech index, but I'm not a big fan of the concentration.
(24:36) So another thing inside of this, and even if you're doing it passively, can we talk about 2022 for a second? The weird year that was. So risk, even if you have passive investments, the 60/40 investor does not have a good year in 2022 when both stocks and bonds go down at the same time.
(24:53) What's the Awesome Portfolio to do to help you with that? And what's a good way to contextualize just managing your exposure through a year where you hate that much of your portfolio? Well, the funny thing about 2022 is that we're kind of in the position we are now because of 2022. After 2022, everybody hated bonds and they've continued to hate bonds and they hate bonds with a burning passion today, which makes me like them a lot.
(25:22) Right. So, but really the one vulnerability of the Awesome Portfolio is rapidly rising interest rates because when that happens, bonds will get killed, stocks will probably get killed, and gold will probably get killed, real estate will be okay, and you have cash. So, that's what happened in 2022, and that was the worst year for the Awesome Portfolio. But it was only down 12%.
(25:50) Which beat 60/40 which was down about 20% that year. >> Talk to me about this idea of, was it non-stationary chess? Non-stationarity chess. What was the, you had a fun word in there. How did you >> non-stationarity? >> Non-stationarity. I'm intimidated by this word, but explain what it means because I get the idea.
(26:10) >> So chess, well, we can talk about chess. Chess is a game that has fixed rules, right? So the pawn goes up one or two spaces, the queen can go any direction, the bishops go diagonally, the rooks go up or down and the rules are fixed and that's the game that you play, right? But the markets are a game where the rules are constantly changing mostly in the form of correlation, right? So at the moment gold is negatively correlated with oil which started when the war started, right, and now people are getting used to this
(26:50) regime of gold being negatively correlated with oil but at some point that negative correlation is going to break down and they're going to be positively correlated and people are going to be caught totally off sides and they won't know what to make of it. So the markets are like playing chess where the rules change in the middle of the game, right? So the rooks now go diagonally and the queens move like pawns and the pawns are like knights and the rules change in the middle of the game and you're totally stuck.
(27:18) That's what it's like being in the markets. >> Let's go back to the idea for this portfolio because I think you put words on it when you were trading messages with a newsletter subscriber. >> Yes. >> Do I have that right? Tell the story of where this got formalized in, what was it, 2018 I think. >> Yeah.
(27:39) So this subscriber I think he used to work at Lehman and he became a financial adviser and moved out to Idaho and he's one of my sharpest subscribers. I don't hear from him very much and I don't remember how we got in the subject but one afternoon it was very quiet and we were just emailing each other all afternoon and he had some kind of portfolio building tool and we were just tinkering.
(28:01) I'm like well what happens if you add this to it and what happens if you add this to it and then ultimately we got to this portfolio that was the Awesome Portfolio, stocks, bonds, gold, cash and real estate and I looked at it. I'm like that's it. That's the answer. So, when I said in the beginning I was only dimly aware of the permanent portfolio, I'm telling the truth.
(28:24) I thought I'd invented the greatest thing ever. It turns out it was a slight modification on the permanent portfolio, but like I said, it's still a huge improvement. >> I want to run through some of these statistics. I want you to add what you will. And this is per whenever the cutoff dates.
(28:40) Do you remember what the cutoff dates were for the analysis in the book? January 1st of this year. >> So January 1st of 2026, just if anybody's trying to figure out where these numbers exactly come from, or they're in the book, buy a copy of the book. Then with book in hand, you can throw it at the author or bicker over doing the math. Sharpe ratio, 0.
(29:00) 6 for the Awesome Portfolio versus 0.7 for S&P 500. Standard deviation 8.22 versus 17.04%. That's a pretty big risk adjusted return. >> Yep. Five worst years negative 11.8% that was 2022 as we just discussed, negative 9.16% in 2008, negative 1.72% in 1990, negative 1.51% 2018, negative 1.09 in 2015. S&P worst year since 1972 down 36.
(29:34) 55% in 2008. Awesome Portfolio down 9.16% in 2008. Just pause for a second here. Was it on the backtest when you realized these numbers were this glaringly different, or discuss? Yes. I'm trying to think of when we figured this out. So, before I had the Awesome Portfolio book, I have Jared Dillian Money, which is my newsletter company.
(30:09) And I actually came up with a special report about the Awesome Portfolio. And a special report is basically just like a PDF. So, before the book, there was a 15 page PDF on the Awesome Portfolio. And that's when I ran some of the numbers and when I looked at the performance in 2008, the massive outperformance of the Awesome Portfolio, I was like, not only did it survive a financial crisis but you were down less than 10%.
(30:39) A lot of that was because of bonds. Bonds ripped, we started quantitative easing. Gold also did well. Real estate did fine. I mean, stocks were down a bunch, but yeah, that was when I first figured it out. >> You said that you can't think of an exogenous event that will cause the Awesome Portfolio to sustain a drawdown as severe as what you'd get in the stock market.
(31:04) Even in hyperinflation, you would have gold and real estate. Explain the hyperinflation point there. >> Well, I think it's something we need to think about. Actually, at the moment, I'm not worried about inflation. I think inflation is coming down, but it might happen at some point in the future. Yeah.
(31:20) I mean, the cool thing about the Awesome Portfolio is you have two things that are financial assets and two things that are real assets, hard assets. And hard assets tend to outperform during inflation. So, commodities, gold, real estate, right? And so, you have a built-in inflation hedge. Real estate did very well in 2021 and that's when we had that big rush of inflation in 2021.
(31:49) Real estate did very well that year. Gold is kind of a crappy inflation hedge. It works, I think, on a 10-year basis, but not on a one-year basis, but over the long term, it's a good inflation hedge. But yeah, you have a built-in inflation hedge. So even in the worst case scenario, if we had 10, 20, 30% inflation, this should perform pretty well.
(32:15) Bonds would obviously get killed. Stocks probably wouldn't like it, but once again, it wouldn't be catastrophic. So the Beatles said, "I am the walrus." You've said, "I am the cockroach." You and Jason Buck have to fight to the death over that at some point, but for now, you can both be the cockroaches. Why celebrate the cockroach in this approach? Did I say I was a cockroach in the book? I don't remember that.
(32:39) >> I believe it was I was never the most profitable trader. I could have stolen this from the blog or somewhere else, but I'm still around. I am the cockroach. I definitely wrote that word down from you somewhere. So, >> yeah. I mean, I haven't talked to Jason probably in nine months. I consider him a friend.
(33:02) As you know, he has his cockroach portfolio, which the funny thing is is pretty similar to what I'm doing, but it's a little more Rube Goldbergy. There's a lot more moving parts. This is, he's got the rich man version of it and I have the poor man version of it. The fees on mine are a lot lower, let's put it that way.
(33:25) So, no, it's the same philosophy. Grant Williams was telling me he was maybe in France and he was talking to some wealthy family and he asked them how they preserve their wealth and they're like, "Look, we have a little bit in every asset class. We have some stocks, we have some bonds, we have some real estate.
(33:46) " They said, "We have some art. Art was part of it. We have some gold." And basically, without even realizing it, they were doing the Awesome Portfolio. And yeah, that's how you preserve wealth over generations. >> It's amazing how often you see that show up. And it's also not a mistake, I think, when you aggregate stuff all the way up and you see the global financial assets portfolio and you go like, okay, >> over time it's going to contain all these things.
(34:14) It's just how you spread out your risk and what you want to take. >> Okay, so let's talk about actually implementing something like this. So if somebody comes to the table, they have their portfolio, they have all their statements. How should they start thinking about, oh, I got 401k money, I got IRA money, I got a savings account, I got these treasury bonds from grandma on my fourth birthday.
(34:34) How do you start putting this together? Well, one of these days I'm saying there may be an investment vehicle where you can do it all in one click. That may happen. But until that happens, you have, look, you own your house, you have x% equity in your house, you have some stocks in your 401k, maybe some bonds, you have some non-retirement assets, you have a bank account.
(35:04) Basically, you have stuff all over the place and you just kind of have to sit down with a spreadsheet and do the math and figure out what you have of each asset class and you're going to have to basically add money to various asset classes to get them up to about the same proportion, right? So it just takes a little bit of work, but >> it's really the initial setup that takes the work once you have the tracking mechanism and you can see what's lower because then part of the rebalancing function you might be solving with your
(35:33) net savings. It might just be cash flows, right? Where do I direct the money into which asset class is treading below? >> Yeah, pretty much. The other thing is you have to remember to rebalance >> once a year. >> Talk about that frequency. You're saying once a year is the optimal for >> So I didn't backtest that.
(35:53) I probably should have, but I think, let's say I backtested it and I figured out you had to rebalance it once every 267 days. Well, that makes things really complicated. So, once a year. >> Corey Hoffstein has papers on this. Somebody needs it, [laughter] ask Corey. Jared will say [laughter] >> once a year is fine.
(36:16) And you can do it on your birthday or your cat's birthday or something like that. So, no, if you don't rebalance, think about what happened in 2025, right? So, gold went up 60%. Okay? If you didn't rebalance the gold at the end of the year, then you took a pretty big hit in 2026. That's why it's important to do.
(36:42) So, yeah, it doesn't work if you don't rebalance it. So you have to do it religiously. >> You know who didn't take a hit? Charlie Munger. Just [laughter] >> he said cash is the most important part of the Awesome Portfolio. He said it dampens volatility, earns interest, gives the ability to buy things in a crash.
(37:01) Just wax poetic on this cash sleeve because I think some people will look at this and say that's a lot of cash. Yeah, I get push back on the cash. I get push back on a lot of things. I get push back because people are like you only want 20% stocks or people say you have 20% gold, isn't that too much, and then when I came up with this in 2018 interest rates were zero and I was advocating 20% in cash. I got so much squealing from people like why am I 20% in this asset class that yields nothing, right? And there's really two reasons. One is it dampens volatility,
(37:40) right? It dampens the volatility of the portfolio, but more importantly, cash is an option. It's an option to buy something else cheaper in the future, right? So, even if it's not investment related, let's say you wanted to buy an engagement ring, right? Which was like a very big, like a $50,000 engagement ring.
(38:05) If you don't have the cash now, you have to sell stocks. You have to sell bonds, you're paying taxes, you're moving money around, it's a big pain in the butt, or maybe you're illiquid, maybe it's all in real estate and you can't sell it at all. Right? So then it turns into a huge hassle.
(38:24) Having cash around is one of the most powerful things in the world. It really is. >> I'm glad you landed it there. I was concerned for a second you were going to propose to me. That's just [laughter] awkward on a podcast. Jared, we're both married men. Crypto. Some people are looking at this too.
(38:41) I've run into this a lot in the last handful of years. People come with a giant crypto allocation. They want to talk about this. How do you think crypto if you're the kind of person who has a large allocation or you have the exposure? >> Well, I explored that in the book. I knew I was going to get questions on it.
(38:59) You could take a couple of percent of your gold exposure and put it in crypto. You could take a couple of percent of your stocks exposure and put it in crypto. I think you should do neither. I think you should leave it out altogether. And here's the reason, right? If you have stocks, bonds, gold, cash, real estate, and crypto, guess what you're going to be looking at all the time? Crypto.
(39:25) You're going to pull up your phone, you're going to have these six things, and you're just going to be checking crypto constantly. Why? Because it's volatile. And anything that's volatile, you have to check like 10 times a day and then you're going to do something dumb and it's going to be a distraction and a pain in the ass.
(39:41) So, probably just better to leave it out. >> And if you have it, you think kind of split the difference on how you think of it. >> Yeah, I would consider half of it to be gold and half of it to be stocks. That's the mental accounting I would do with it. I like this for the idea of you're trying to intentionally bake in boredom or stuff that you're not going to be tempted to look at.
(40:09) Yeah. I mean, look, I work in the markets. You work in the markets. My curse is that I have a Bloomberg Launchpad. I have all these charts and I stare at them all day. I can't wait for the day that I don't have to look at this anymore. Imagine how good that's going to feel when I can just play music or go for a walk or travel or whatever.
(40:36) I'm not pulling up the Bloomberg app on my phone seeing where everything is. I just wish I could live like a normal person and just do that. It is an affliction. Is an affliction and I'm with you. I look forward to that. Another part that comes up here is just the sheer status measurements of us and our neighbors and the people.
(41:02) And you address this in the book too. What do you do when the markets are having a 25% rip of a year and your buddy's all in the S&P 500 or is all in a handful of the tech stocks that are doing the best or whatever it is or the cryptocurrency and you're like, well, I'm up a third of what he's up. How do you solve for that? >> I solve for it by writing about it.
(41:26) There is a chapter about FOMO and I actually have a couple tables in the book. I put down the number of years that you were underperforming the S&P by 10% or more, right? But then there's a table of you're outperforming the S&P by 10% or more. And if you look at the years where you're outperforming, those are the really bad years, right? Those are 1973, 2008, 2001, etc.
(41:58) Those are all the really bad years. So, what I just tell people is, look, you're on your path. Your path is different from everyone else. It's going to work out in the end. You're going to be happier. Don't get caught up in FOMO. Just try to ignore the noise. And trust me, at some point the roles are going to be reversed and you're going to be at a party and somebody's going to be complaining about all the money they're losing and you're going to be up like 5%.
(42:23) >> It's the almost shut and freak or worse where it's like you touch your hand on the hot stove and you burn yourself and you do the ah versus the person whose full face went into the frying pan [laughter] and now it's a two-face scenario. Another quote that I love, the definition of a bubble is when people are making money all out of proportion to their intelligence and work ethic.
(42:46) Shorter version, when dumb people get rich, you are usually near the top. Is that just to give comfort when you're sitting along the way? Is it to give comfort? Like give yourself comfort to say the dumb people are chasing this. My patience will be rewarded. Well, this quote isn't in the book, but actually I've said this a number of years in The Daily Dirtnap.
(43:11) In the stock market, you basically have to be two different people at two different times. You have to be dumb on the way up and you have to be smart on the way down, right? And when I say dumb, I don't necessarily mean unintelligent, but basically, you have to be a simpleton.
(43:30) You have to look at a stock and look at the chart and be like, "Oh, it's going up. I'll buy it." Right? Literally that simple. Bull markets can be very easy if you play along, right? So, but as you get near the top, then you have to have some skepticism and you have to say, okay, people are making money all out of proportion to their intelligence or work ethic.
(43:56) " And that's when the skepticism kicks in. Then you can make money the other direction. >> A reminder that you've thrown a bunch of times that I really appreciate, Brent Donnelly on this one too. BusinessWeek 1979, the cover is the death of equities. That has happened before and it just feels a billion light years away from where we are right now.
(44:19) Why is it important to remember that these swings happen in sentiment and just the myths of public belief? >> Yeah. One of the other things I wrote in the book was I talked about the crash of 1929 and the Great Depression. And a lot of people don't know this statistic, but the stock market went down 89% from 1929 to 1932, right? And people consider that to be some aberration, like it was a once in a millennium event, like it'll never happen again.
(44:59) I don't know, maybe it does. It clearly could happen, maybe it does happen again, I don't know. And then you see some of the valuation experts look at the market today and be like, look, even if you had a 30% pullback the market is still overvalued here. To get back to where it was in 1979 you would literally have to have like a 70% drawdown, right? And extremes in valuation can happen over long periods of time.
(45:32) So, I don't think that we're in a new normal. I don't think that we have reached a permanently high plateau, right? I don't think that's happened. So, not to say that the market obeys laws of physics or anything like that, but to the extent that valuations are high now, they will probably be low at some point in the future. I don't know when that is.
(45:56) If it's 3 years, 5 years, 10 years, 30 years from now, I have no idea. >> Probably when you stop watching the screens [laughter] with that, that's when we'll get that decline. I want to spend just a second on it because we hinted at it with the Munger statement. You tell the story basically, very personal story about your personal net worth.
(46:21) 2006 to call it 2009, that round trip, puking in a trash can once or twice. You've walked through this in a couple of different places in the past. You want to tell what that round trip was like and how that shaped your philosophy here? >> Yeah, so I started working at Lehman when I was 27. At age 30 I became a millionaire which was in 2004.
(46:44) And which is pretty young to become a millionaire, the first time I saw two commas in the bank account, right? And then in 2008 or seven at the highs I was worth 2.4 million. Okay. And then at the lows in 2009 I was worth 1.2. So basically I had half a million dollars of Lehman stock which got vaporized.
(47:13) I actually performed better than the market on the way down but small consolation, I was still down like 30, 35% in my portfolio. And yeah, when I started The Daily Dirtnap in 2008 I had been cut in half and it was trading at 99 cents a share. Bank of America was $3 a share.
(47:41) Every bank was going bankrupt. It seemed like the end of the world. And I literally had just started this stupid newsletter in the middle of a crisis. And so I would come to work every morning and throw up in the trash can. And I did this every day for like three months. I don't want to go through that again. Understandably.
(48:10) And the amount of red on those screens in that time, that's forever burned in my brain of >> Yeah. >> Yeah. And to know you were getting vaporized on those shares. >> What do you think? So, I hand you the keys to the DeLorean, 88 miles an hour. We're back in 2006. Maybe not with perfect hindsight even, but what do you think? This Jared in this timeline picks up a book called The Awesome Portfolio and says, "This might be on to something.
(48:37) " How would that have changed your allocation at the time? >> Oh my god, it would have, I mean now I still would have lost the Lehman stock. It was restricted. I couldn't sell it. So I still would have lost that. But yeah, I would have been down 9% in 2008. I would have had 1.8 million instead of 1.2, which would have made a huge difference.
(49:02) Probably wouldn't have been puking in the trash can >> every other day. Yeah. >> Do you think at 30 you would have listened. Do you think at 30 you would have gotten it? >> Yes. 100%. Yes. >> Okay. >> Why do you think you would have gotten it? And I'm thinking about this, just had Jack Raines on the other week talking about his book Young Money in his 20s and thinking through this.
(49:24) I do feel a heightened sense of awareness in this current generation that some things are messed up possibly because of trading experiences and getting cut in half and figuring it out in other ways. But do you think people are susceptible to this message right now, especially young people? >> No, they're not.
(49:42) No, this book is coming out at a very bad time, right? I could really use a crash on the launch date. That would really help me out a lot. People are still in the mode of I am making 12, 15% a year in stocks. Everything is fine. Why do I need to worry about this? This guy's a perma bear, which I'm not, but it's been, if you take out the pandemic, which only lasted a month, it's really been 18 years since we've had a real bear market. And 2022 was 20%
(50:23) and that was pretty severe but not on the order of something really big. And if you're under 42 years old you have no memory of that. You just didn't live through it. You don't know what it was like. It's funny because I teach at the university. I teach finance and sometimes I'll talk about the financial crisis and in one of my classes I actually showed The Big Short and they were born in 2008. They have no idea what happened, right? >> They don't even remember a family member
(51:00) stressed. >> No, >> they don't even have that memory because they >> no, passed. So I bring it up and I think it's interesting because with Jack in his book, he gets the experience of getting annihilated in SPACs and warrants and stuff like that. So he makes the money and then loses a giant amount of it.
(51:19) Goes like, "Oh, I turned whatever 30,000 into 400,000. Now I'm going to turn it into a million." And then gets wholly humbled and it's like, "Yeah, I now have seen this is what this mechanism can do." He was the chicken inspector who doesn't eat chicken anymore after that experience or in much more limited quantities.
(51:37) Does it take an experience like that then to make it a viable oh I need to go do this? You have to learn this the hard way. I generally, people do have to learn it the hard way. The point of this book is so you don't have to, right? So that will never happen to you. You won't have to experience something like that.
(52:01) So, especially in the first half of the book, I talk a lot about the history of the stock market and the great bear markets and stuff like that and I try to put it in terms that are visceral enough for people to understand. When people look at a chart of the stock market over time, especially a log chart, I hate log charts, right? I hate log charts with a burning passion because if you look at a log chart, 2000 was like a little blip. You're like, oh, that wasn't so bad, it was a 50% draw
(52:36) down. It's like this little blip. You're like, oh, I could ride that out. It's insanity. >> Yeah, and it loses the context in the charts and when we zoom out it loses the anecdotal life experience that's easy to quantify away and it's that qualitative part of being alive through it.
(52:57) And hey, what did the tech bubble feel like if you were working at a tech company and you're losing your job and your portfolio is down 80% and whatever else? Same with your financial services sector experience. >> Yeah. >> So Jared, I think the book is incredibly important. I want to give one more pass for the person because I'm going to flip from the 20-year-olds for a second.
(53:16) The 30-year-olds, I go to the 60-year-old. Somebody's 60 years old. They read this book. They're looking at their house with no mortgage. They're looking at 80% stocks and starting to think, I should probably be dialing this back because this has done insanely well the last five or so years of my life.
(53:34) What's the first baby step they take back towards doing it? It's just a spreadsheet. What's the first thing somebody would do? Gosh, I have some neighbors kind of in the same position. They're not, well, I guess one of them's 60. But they're index fund investors.
(53:55) They do just like what I was talking about. They have it all in the S&P 500. And for the last couple of years, I'm like, just sell something. Sell like 5%. Sell like 10%. See how it makes you feel, right? To take a little risk off the table. So, for all the senior citizens that are totally loaded up on tech stocks, just take baby steps. Sell like 10% of it.
(54:20) Put it in cash, put it in gold, put it in something else, and just literally just see how it feels. My guess is that your stress level will come down. Not a lot, but it'll come down a little bit. Every time I sell something, whether I sell it for a loss or sell it for a gain, I always feel better.
(54:42) I always feel better. Well, the attention before that, if it's occupying attention, the attention comes with a cost. >> Yep. >> Alleviating that cost can go a long long way. And I think this book helping people zoom out, see the five sleeves, think in terms of, at least here's a way to measure it. At least here is a ruler to put up against those five sleeves and go yep, yep, yep.
(55:07) Oh, that's too high. Bring that back down. Goes a long long long way. Jared, people want to find the book. Plug it again. Tell them where to bug you on the internet. >> Yes. So, here is the book. You can get it off Amazon or Barnes & Noble or any place else. I think it's going to be in stores.
(55:27) I'm, No Worries was an airport book, so I'm hoping this is an airport book. We'll see. You can follow me on Twitter, Daily Dirtnap, although I don't tweet a lot there. For newsletters and research and stuff, you can go to jareddillianmoney.com. Check Jared out in all the places. There's a lot of experience that goes into these.
(55:49) It's a lot of good thought-provoking questions, not just on the monetary and investment side, but on the psychological side. And for that, I'm truly grateful that you put a good market perspective book like this out here. I think this is going to be really useful to a lot of advisers, allocators, and do-it-yourselfers. Thanks, Jared.
(56:04) >> Thank you. You're watching Excess Returns. Like, comment, subscribe, all the things below and we are out. >> Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. [music] You can also follow all the podcasts in the Excess Returns Network at excessreturnspod.com.
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