Most investors haven’t experienced a long-duration bear market, says Jared Dillian That big market meltdown is out there, even if investors these days don’t want to see it in a stock market that is now on year four of a bull run. So says, Wall Street veteran Jared Dillian whose latest book —“The Awesome Portfolio: A Simple, Stress-Free Approach to Investing”— carries the not-so-popular message that investors need diversification. His message is to do that through equal-parts stocks, bonds, cash, gold and real estate.
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Those with 40-year investing careers will have witnessed a drawdown of 50% or more during that time, said Dillian, who spent seven years running the exchange-traded fund trading desk at Lehman Brothers before its demise in 2008. His 2011 book, “Street Freak: Money And Madness At Lehman Brothers,” was based on that experience. The typical person out there doesn’t think about risk.
They don’t have to, they haven’t had to.” While early 2020 delivered the fastest bear market in history, the S&P 500 recovered, and even a 20% drop for the index in 2022 doesn’t stack up historically as that bad, he said. What kind of pullback might wake up some investors? Because you say, what if it goes to $300,000, what if it goes to $250,000?” His “Awesome Portfolio” only needs to be rebalanced once a year and “that cuts your volatility in half and eliminates your drawdowns,” he says.
Dillian added that even an investor who think they can take the stress of a bear market, will be unhappy and miserable “the whole time until you get back to the high-water mark.” Over the last 10 years, his Awesome Portfolio — 20% in equal parts to bonds, cash, gold, stock and real estate— has returned 9% a year, which he compares to the S&P 500’s 10% annual return over 100 years, 11% return over the past 54 years, and around 15% or more for the past 10 years. He believes investors who can’t live without that extra 1% return are too focused on the returns when they should be thinking first about the risk they’ll accept to get that. Dillian recommends ETFs for that portfolio starting with the Vanguard Morningstar Total Stock Market ETF , which also gives investors exposure to underperforming small caps, which he thinks could turn around.
The bond portion is Vanguard Total Bond Market ETF , which includes Treasurys, credit, mortgages, the F/m US Treasury 3 Month Bill Fund for cash, the iShares Gold Trust and the Vanguard Real Estate ETF . Dillian said he recently put a chunk of his own money into long-term bonds, acknowledging it’s a bit of an unloved asset, to which he quoted from his book: “If you do not have something in your portfolio that you hate, you are not diversified.” Bond aversion, he said, is being driven by an “irrational fear” of inflation, which has been above the Fed’s target for six years, but not by much, and a $2 trillion deficit that he doesn’t think will be a forever problem. Getting 5% for 10 years through a 10-year Treasury also has been historically pretty good, he added.
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