Make retirement awesome again with Jared Dillian

0:09Jared Dillian, very happy to have you on Investing Experts podcast. For those that don't know, have been in hiding perhaps, and have not afforded themselves your content yet, It's Jared Dillian, founder and content creator at Jared Dillian Money, also the author of most recently The Awesome Portfolio, and very excited to get into that today. Perhaps you've read the book No Worries, How to Live a Stress-Free Financial Life. Jared, really happy to have you on Seeking Alpha. Really great to have you on Investing Experts. Thanks for making the time. Yeah, thanks for having me. I've kind of been in hiding lately, so it's good to crawl out of my cave and do a podcast.

0:57Always important to peek out and see what's happening in the real world, on the online world, both perhaps. So first of all, why are you out of hiding? Why poke your head out? Is it to talk about the book? Is it for other things? Yeah, I would say in the last couple of years, I've been keeping a little bit of a lower profile. Um, it's, uh, you know, I've been doing my newsletter for 18 years, uh, which is a really long time to do anything. And I've been focusing more on, uh, managing money and I have my other extracurricular

1:30Jared Dillian:pursuits, but, uh, yeah, the, the book, the awesome portfolio is coming out on September 8th. Uh, I am super excited about it. It's kind of been a, not lifelong, but at least since 2019, a mission of mine to get people to save for retirement in a much smarter, low stress way than the way they do it currently. I think the way we do it currently is really a mess and, you know, prone to all kinds of problems. Well, maybe let's get started there. And I'm curious, it was coming from the newsletter and creating content. Have you always had these ideas in mind to put them out in book form? I mean, the one idea that I've had is, you know, the conventional wisdom around saving for retirement for most people is that you put all your money in a low cost stock market index fund and you dollar cost average it.

2:29And, you know, anybody who's ever sat down with an Excel spreadsheet for the first time and discovered compound interest, you know, if you max out a 401k for 40 years and you dollar cost average it and you get 11 % returns in the S &P 500, which is what we've had for the last 40 years, you're going to have a huge number when you retire. And I think people are kind of seduced by that number. And what they don't realize is that the path to get there is very rocky sometimes. And that if you're going to be investing over a 40 year period, there's probably going to be at least one instance where you have a 50 percent drawdown or more.

3:14Right. And how you behave during those drawdowns is super important. You know, I think also the conventional wisdom is that stocks always come back and all you have to do is keep dollar cost averaging and do what you always did. Some people can't do that. Some people will puke and sell their retirement funds and stop compounding. And for the people who manage to keep doing it, they're just going to be really unhappy until they get back to the high watermark. Right. So what I'm proposing is something that, first of all, is going to prevent you from puking. And second of all, the drawdowns are minimal.

4:02so you're never really going to be in that psychological position where you have to decide of whether of what you're going to do and you can just let it keep compounding and go about your daily life and the trade-off is very small trade-off is just a percent or two in returns so have you ever seen that picture where it's like how people envision life and it's just an uphill or it's just like a straight kind of like bike ride to the finish line and then what it's life is what life is actually like. And it's like potholes and, you know, thunderstorm and what have you. So like to your point of it's a lot easier, like everything is, it's a lot easier said than done in terms of seeing to the retirement finish line.

4:41So what would you, what do you encourage investors? I mean, you just spoke a little bit about it, but practically speaking, how do you encourage investors to plan for this part of their lives? First of all, stocks right now are the only game in town. And getting back to your earlier comment about that straight line up, you know, really for the last 18 years, we've had the straight line up. We had the pandemic in 2020, which didn't last very long. We did have a bear market in 2022, but it wasn't that bad. It was a little bumpy in 2011, 2012, but really since 2009, the stock market has pretty much gone straight up.

5:22So people haven't been tested at all, and they think that's what investing is like all the time. What I am proposing is that stocks are not the only game in town, that you have to diversify across asset classes. So in portfolio theory, you have this concept where if you have asset A and you have asset B, which is not very correlated to asset A or maybe negatively correlated, and you put that in the portfolio with asset A, then the volatility of the portfolio is going to come down. And if you keep adding assets that are not correlated or negatively correlated, it's really going to bring the volatility of the portfolio way down.

6:06Right. So what most people have right now is they have the S &P 500, which is volatile. You know, it's it right now. It's a 16 ball. It moves at 1 % a day. You know, I, I really don't like the idea of my entire life savings moving around on average 1 % a day. in crisis periods, it can move 5%, 6%, 8%, 10 % a day, which is breathtaking volatility. And I think in the U.S., you know, we are a nation of risk takers. We're a nation of gamblers. People in other countries don't do this. In Europe, nobody puts all their money in the stock market. In Japan, nobody puts all their money in the stock market.

6:52Like, we are really the only people that do this and we've kind of gotten used to it. But like I said, the market's gone up for 18 years. I don't maybe goes up more, but who knows? But, you know, if history is a guide, it's going to get bumpy at some point in the future. What would you say to people that, you know, to your point of this upward slope in the stock market and to the point of what the market has looked like this year, the past couple of years in terms of navigating these challenging moments, but staying really on the upswing in terms of how, in other words, like black swan events or geopolitical events that would have taken the stock market down in previous years are not doing that.

7:38And are we in a new normal, like as the world is evolving and as investing is changing and evolving. Some may say atrophying. But what would you say to the point of the stock market being the only game in town and that game being a little bit more gamified as the days and years go on? What would you say to that? Well, I think what's different is what's different about what's happened in the last 18 years is that people's psychology has changed. You know, there's a whole, not even subculture, it's a culture of investing, whether you want to call it the Bogleheads or anybody else, really this belief, this belief to your core that the stock market always comes back, right?

8:22And, you know, for sure in history, it has, right? Like the stock market has always come back, but that's not really the question. The question is, does it come back in a timeframe that is useful to you, right? So how long can you stay below the high watermark? So in 1929, the stock market crashed and you didn't get back to the high watermark until 1946. So 17 years, right? So if you were invested all in stocks in 1929, you, and you were like a month before retirement, you were totally screwed, right? Because you lost 89 % and you, now you have, your standard of living and retirement is going to be much lower.

9:121974, 2000, 2008, those are the four great bear markets. But really like what's changed is, is that people believe in stocks so strongly, like, I don't know how many senior citizens, you know, but we have 80 year olds who have portfolios of all stocks, right? Which is insane. Just, you know, we, what we used to say when I, when I first started in the business, like three decades ago, we used to say that your age should be your percentage allocation of bonds. So if you were 70, you should be 70 % in bonds. Nobody does that anymore. Nobody does that. You have people, 60, 70, 80-year-olds who have all stocks.

9:58So a roundabout way of answering your question is the psychology of investing has changed so much. It's not even necessarily that people are bullish. It's not necessarily that they think stocks are going to go up. It's that they believe in the stock market as an institution which never lets them down, right? and you know recent history it shows that it hasn't so what what is your what are your like two main points that that you share with people that that are confident that this time that this time is not is is different in the sense that it's not going to be different for quite some time yeah that i actually don't know the i don't know the answer to that question you know as somebody who trades, there's billions of dollars that come into the stock market every day.

10:50I talked to my friend Eric Valchunas today. He's the head ETF analyst at Bloomberg. And he gave me an interesting statistic. He said that even in 2022, which was a decent bear market, there were$600 billion into ETF inflows that year. He gave me another statistic. In 2008, the year of the financial crisis, Vanguard still had inflows every single month in 2008. Incredible stuff. So the point is, is that there is a persistent bid to the stock market, which has continued for a long time. And I really can't predict what's going to change that. I don't know what the catalyst is going to be. I'm not bearish.

11:41I'm not short. But, you know, just looking back over history, there have been periods of time where people have had that degree of confidence in stocks and it hasn't worked out. So you have to diversify across asset classes into other stuff. Bonds in particular, you know, nobody likes bonds right now, which is funny. Everybody liked them when they were at 1 % yields, but nobody likes them at 5 % yields. I think bonds at 5.3 % look pretty good. I think you should have them as part of your portfolio. To the point about that high number and the ETFs, that's, I think, a big reason or a very solid way that people are staying in the market and continuing to be interested in the market.

12:30There's so many specialized ETFs. There's so many ways to get into the market now. It seems like that's definitely a lever that's been pulled and will continue to be pulled in terms of bringing more and more people into the market. You said that you manage money now. Are you doing that for a select few that you know? Or how does that work, if you don't mind me asking? I have a very small commodity training advisor. Not much in the way of assets. I've been doing it for two years. It is growing. The returns have been decent up until the last couple of months, which have been tough. That is what I'm doing now.

13:07And why? Why focus on that? You know, once a trader, always a trader. You know, I got into the trading business in 1999. I worked at Lehman from 2001 to 2008. I've been trading my own money ever since then. And I thought it was time to get back in the game. Like a stand-up comedian who's been on a show and now is getting back out on the road, trying out his materials. Yeah. Yeah. So a CTA is the simplest way I can explain it is it's kind of like a hedge fund that lives in the futures world instead of the stocks world. So I trade anything that has futures on it, which includes commodities, but also stocks, also bonds, also currencies.

13:53It's a macro discretionary CTA, very top down. So I'm just trading anything that has futures. What are you trading? What are you liking? What are you staying out of? I mean, at the present moment, I'm very bullish on bonds, especially the front end of the curve. I'm bearish on the dollar. And I think precious metals have bottomed here. And that's really all I want to go into on that. Anything to say further on why you're bearish on the dollar and or what gold and silver have done in the past year, kind of the trajectory of that? Well, you know, gold had a 28 percent drawdown. It's still in a bull market.

14:37Silver had, what, a 65 percent drawdown, but I still think it's in a bull market. As far as the dollar, I think people are misunderstanding Warsh. You know, his first Fed meeting, he was very hawkish. He talked about price stability all the time. And then he declined to raise rates at his second meeting. And really what Warsh is saying is, look, the Fed isn't going to do much here if, you know, we're going to let the bond market conduct monetary policy. So the back end sold off, the curve steepened, which, you know, actually has an immediate tightening effect on the housing market and capital goods.

15:14And actually, I think letting the long end do the work actually frees him up to cut rates at some point in the future, cut Fed funds, which is a long way of saying that I think that's bearish for the dollar. Anything to add about the inflationary picture? I think inflation is peaked. I'm actually, I don't think inflation is a problem. And if the war ends soon, then it's really not a problem. You saw last month's data where you had big misses on CPI and PPI and PCE. And people just explain those away as if they were outliers or aberrations. I really don't think it's an outlier. I think inflationary pressure is decreasing.

16:02so and anything to note about you know there was a lot of talk about gold not behaving as a safe haven asset anything to note there um you know gold is kind of what people want it to be it's it's many different things people say it's an inflation hedge then it doesn't really act like an inflation hedge people say it's a safe haven asset then it doesn't really act like a safe haven asset, the one thing that gold has the strongest correlation to is budget deficits, right? So if you think that there is any reasonable expectation that we're going to significantly cut the deficit or bounce the budget, then you would be bearish on gold.

16:47I don't think that's going to happen. I think actually the opposite is going to happen. So I remain bullish for the foreseeable future. What are your thoughts about the housing market as it pertains to the broader economy or what would you add for investors there? The housing market has pretty much been at a standstill for the last two or three years. Not a lot of transaction volume, but prices have not been coming down. Actually, I'm not a housing bear. I think prices probably go sideways for a period of many years, but I think the next move is probably up rather than down. look like, you know, the affordability problem, you know, houses are very unaffordable because of prices and because of interest rates.

17:34And the affordability problem gets better over time if housing returns zero, like if it just goes sideways for 10 years. If housing goes sideways for 10 years, then housing is going to be more affordable in 2036. And, you know, based on my view on interest rates, I do think rates come down. And I do think, you know, in some time, we'll see five, five and a half percent mortgages and that'll help. Any sectors or currencies or any angles or areas of focus that you would encourage investors to take a second look at or think about it in a new way? No, I really don't. I really don't have a view here.

18:17I guess the only thing I would say about sectors is that I think energy is probably peaked. You know, The war will end at some point. And when it does, I think crude goes back to the 60, 65 range. I think sentiment is very hot on energy. When I talk in my newsletter about cutting back or selling energy, I get a lot of people protesting. I think people are very married to these positions.

18:47Jared Dillian:And I think I'm a little bit bearish on energy. I'm just specifically referring to, you know, the majors, E &P, the refiners, the whole energy complex. Getting back to the conversation around retirement, we started this series recently with Raul Shah about tax planning for, I mean, life in general, but specifically around investing. And, you know, his point is that so much is lost just on non-efficient tax planning. Do you have a point to say about that aspect as it pertains to not only having enough money when you retire, but keeping that money while you're retired? Because to your point, many people are living much longer than was anticipated 10 years ago, 20 years ago, 30 years ago.

19:37In terms of the awesome portfolio, in the book, I do not talk about tax consequences at all. There are some tax consequences to the awesome portfolio. So the awesome portfolio is 20 % stocks, bonds, cash, gold, and real estate. And you have to rebalance it once a year. So once a year, you're going to be selling winners and buying losers. So you will have a tax bill, some kind of tax bill at the end of the year, every year. Um, there's ways to structure that. I'm looking into this. Um, you know, if you put it in the ETF wrapper, there's great ways to structure it where you can defer taxes until you sell the ETF.

20:19Uh, that's one thing I'm looking into. Uh, but yes, if you just construct the awesome portfolio on your own, there will be tax liabilities. Does your research involve talking to wealth managers, accountants, just your own research? I don't talk to wealth managers because they think I'm nuts. Why? Well, I mean, everybody, you know, wealth managers, in my experience, are kind of weather vanes for sentiment about the stock market. Just to give you an example, you know, my mom retired in 2010, which was, you know, basically a year and a half after the financial crisis. And she had an advisor and her advisor said to put her all in treasury bonds.

21:08And I said, no, no, no, you're going to put her all in stocks. And I got into a fight with the financial advisor and I won and we put her all in stocks and she three extra money. And then a couple of years ago, I said to the financial advisor, okay, it's time to put her in bonds. Then I got into an argument about putting what stocks are going up forever to keep her in stocks. So I don't find wealth managers to be very useful indicator. Well, I mean, they are useful, actually. But in terms of the construction of the awesome portfolio, the pushback I usually get from wealth managers is you're not enough in stocks.

21:54Only 20 % in stocks is crazy. 20 % gold is also crazy. Like maybe you should do 5 % or something like that. 20 % in cash is nuts. That's a drag on performance. why would you have 20 % in cash? So, you know, really when I talk to, you know, plain vanilla, you know, wealth managers about this, they, they think the whole thing is crazy. You know, it's, it's so divergent. It's so goes against everything that they've been taught, which is basically, you know, you have somebody in something approaching a 60, 40 portfolio, maybe, maybe 80-20 if they're younger. And the idea that you would introduce these other asset classes into the mix is just anathema.

22:49Would you say that wealth managers are somewhat akin to ETFs in the sense that it's good for broad strokes and people that don't want to invest too much of their time and effort into figuring out the story. And there's not much nuance, but it fills a need. Well, I don't want to beat up on wealth managers too much because they do serve a really important purpose, really two purposes. One, they put people in portfolios that I don't want to say they're safe, but they're consensus and they generally are lower risk than what somebody would put together on their own, right? So there's some risk mitigation that's going on.

23:38And second, they're there for behavioral coaching, right? Because look, you know, wealth management is a relationship business. And if the market goes down 20, 30, 40%, people are going to panic. They're going to call up their advisor. the advisor is going to say, don't, you know, jump off the ledge, like let's stay invested here, which is all good advice. And they keep people invested. So, you know, I think those are two very important functions. Like I don't, I, you know, I, I, I said kind of some unkind things about them in the beginning, but you know, they really, you know, a lot of them do really good work.

24:15Somewhat like a personal trainer almost. Yeah. Yeah. There to keep you on track. What else would you say about retirement? What else should investors, what's your kind of one to two main, other main takeaways that you would encourage investors to keep in mind? Well, first of all, let me give you some statistics on the Awesome Portfolio. Since 1971, and I'm going to use 1971 as a starting date, because that's the first point in history at which you could own gold, right? So we have to start at 1971. Since 1971, the S &P 500 has returned 11%. Over the last 100 years, the S &P 500 has returned 10%.

24:58So it's picked up in the last 50 years. The awesome portfolio since 1971 has returned 9%, which is pretty good. A 60-40 portfolio has returned a 9.44%, okay? So it's a little, it's a tiny bit worse than the 60-40. But if you look at the sharp of the awesome portfolio versus anything else, it is much, much higher. It is a much more efficient use of risk. It basically has the highest sharp of any linear combination of portfolios that you could put together. Also, drawdowns. Now, if you're in the S &P 500 in the financial crisis, you took a 38 % drawdown in 2008. And I don't even think that was the worst drawdown in the last 50 years.

25:53The awesome portfolio in 2008, you had a 9 % drawdown. And the worst year for the awesome portfolio ever in history was down 12%, which was in 2022. right so you have this thing which has about half the volatility of the stock market you have very low very low in the way of drawdown drawdowns you have this incredible sharp ratio um and all you're trading off is one or two percent in the way of returns now one or two percent after 40 years adds up to a lot of money it's in the millions right because that one percent compounded over time makes a big difference. But the point I try to make is, you know, if you're just in the S &P 500, there's no way you're going to be dollar cost averaging that perfectly.

26:49If the market goes down, you will stop contributing. If the market goes up, you will contribute more. You know, you can look at some of the statistics on how Vanguard investors have done on their own without an advisor. You know, you have a lot of Vanguard customers who are in the S &P 500 fund and a lot of other funds, and they're basically returning zero because they keep trading in and out of funds. So if you stick with the awesome portfolio, 9 % over your investing career is pretty good. By the way, the book is a great read. So kudos to that. And everybody wondering if they should partake in reading, much like Jared is himself, a very entertaining and informative read.

27:33It was a really easy, easy read, but also full of, I think, a lot of really good nuggets to think about and marinate on. What would you say has been have been some of your takeaways, or if you have one salient takeaway, or kind of an evolution of thinking from when you started until now? Would you, what would you say that is, if anything? Well, you know, the interesting thing is, is that I came up with the idea for the awesome portfolio in 2019. I was, I was trading notes with one of my subscribers who was a financial advisor. And we, we were, we kept building these portfolios and we were tinkering with it.

28:12And then I came up with this portfolio that was 20 % stocks, bond, gold, cash, real estate. And I was like, wow, this is incredible. And at that point, I hadn't really done the research on all the alternatives and I hadn't, I hadn't computed the sharp. I hadn't done any of this stuff. And then over time, when I started to do that work, do that mathematical work, I was, it really, it confirmed my priors. I was like, yes, I knew that it was good. And this basically proves it. And that's, that's one of the things I like about this book. This is not my most well-written book, not by any stretch of the imagination, but what I like about it, it is a bulletproof argument.

28:56So you can read this book and I make the case for the awesome portfolio and you're going to finish the book and you're going to say, well, either I believe in this and I'm going to do it, or you know what? I want the extra one or 2%, I'll take the risk. And that's fine. Some people will make that decision, you know, but I think it's an airtight case, like an inescapable case for the awesome portfolio. What are some metrics or data points that you use heavily and that you would encourage investors to at least think about, if not use on their own? Well, one thing is, I don't know about data points, But what I would like people to start doing is targeting risk instead of return.

29:43OK, so if you take a typical retail investor, they're targeting return. So they say, I want to make 50 percent a year. So I'm going to buy Bitcoin or I want to make 11 percent a year. So I'm going to buy stocks. That's not the way you should look at it. You should look at what risk you're willing to accept first and then back out the return. Right. So maybe you're comfortable with the risk of a five year note. Right. OK. Then you invest in a five year note and you get four percent returns. People should think about the risk first and the return later. And people do it in the complete opposite order.