What if the greatest risk to your portfolio comes from the investments you’ve been taught to consider safe?
Conventional portfolio allocations often reflect assumptions about risk that investors rarely question. Jared Dillian challenges those assumptions.
He argues that diversification, emotional discipline, and the ability to withstand market volatility may matter more to long-term investment success than maximizing returns.
In this episode of The Gold Exchange Podcast, Dillian explores why a portfolio designed to endure difficult markets may prove more valuable than one built to outperform them.
Read the transcript below.
Transcript
Jared Dillian
20% in gold does not sound like a lot to me, but like you said, most people are like, well, you know, you have 2 or 3% and that’s all you want. Like 2 or 3% gold doesn’t do anything. Like it’s not going to diversify anything. But the same people who say that 20% gold is too high think that 60% stocks is not high enough. And I’m like, I do not understand this at all. Like, I don’t know where this comes from.
Monetary Metals
Welcome back to The Gold Exchange Podcast. My name is Ben Nadelstein. I am joined by the one and only Jared Dillian. He’s the author of 7 books. He’s the editor of the Daily Dirtnap, and of course, he’s a writer, an investor, and maybe most interestingly, he’s an electronic music curator. But today, he is my guest on The Gold Exchange Podcast. Jared, welcome back to the show.
Jared Dillian
Awesome to be here. Thanks for having me.
Jared’s outlook for gold
Monetary Metals
Jared, you’re one of the few commentators who has a pretty strong opinion on precious metals, but you can go either way. Sometimes you say, hey, listen, you know, I think we’re in a bull market for gold. Other times you say, I think this is a little bit frothy. Where are we today? You’ve said we’re in the 4th inning of a kind of gold market. You’ve been pretty bullish on gold and silver in the past. Where do we stand today?
Jared Dillian
So we’re in the middle of a 30% drawdown, which is painful, but I think it hasn’t been super painful for people because people’s cost basis is pretty low. Like my cost basis is like $550 an ounce, right? So, you know, I can take a 30% drawdown. I’m sure there are a bunch of knuckleheads that got involved in the last run-up to $5,600. They’re still in the process of getting flushed out. Even after a 30% drawdown, I don’t see a lot of panic.
I don’t see that sentiment capitulation that I would like to see on the downside. That’s kind of what concerns me. Look, I’m a long-term bull. I think eventually we get to $10,000 an ounce, but it feels like we have more downside just because we haven’t had that capitulation. We had previous resistance at $3,943. We took that out to the downside. We’re actually above that right now. Gold is having a pretty good day on the war news. I mean, if we had taken out that support and then ripped above $4,000 and closed on the highs, then I might have a different opinion, but it’s still the pain trade for sure.
Government deficits and the case for gold
Monetary Metals
And how do you value gold? So for some people, they value gold as, hey, this is a hedge against inflation. Other people say, no, this really has to do with real interest rates. Other people say it has nothing to do with anything. It’s just the fear trade. How do you, as Jared Dillian, kind of value gold, not only for the portfolio, but just for prices going forward?
Jared Dillian
Philosophically, I view gold as an option on debt monetization, right? So sometimes that option is worth a lot. Sometimes it’s worth not very much. Like, as I look around, the one thing that would kill the bull market for me was if Ron DeSantis was elected president and we balanced the budget. If that happened, I would sell my gold for sure. Or let me put it this way, if 6 months ahead of the election it looked like that was going to happen, I would sell my gold.
But I don’t think that’s going to happen. I think the possibilities we’re going to get in 2024 on the right and the left are going to be very favorable for gold. I mean, just from a practical standpoint, I will say that there’s a lot of hyperventilating about the deficit, and the deficit is not that bad really. It sounds scary because it’s $2 trillion, but as a percentage of GDP, it’s 6%. We’ve had worse deficits in the past. First of all, in World War II, but also more recently during the pandemic and also in Obama’s first term in 2010, 2011.
And if you look at that particular deficit, that was after the financial crisis and we had just spent all this money on TARP and crisis and stuff like that. And we were running deficits to GDP of 12%. And we had just passed Obamacare and it looked like the debt problem was going to— I mean, people People were talking about failed bond auctions and stuff like that. There was a, you know, the deficit was a real issue. And then what happened was the Republicans were elected in the midterm, you know, in a majority in both houses. And it stayed that way for the next 6 years.
And the deficit went from 12% of GDP to 2% of GDP, right? So something like that could happen. And if you look at, like, if you look at the things that gold is correlated with, it’s sort of correlated with inflation over the long term. But what it’s really the most correlated with is budget deficits, right? So if you believe that we were going to balance the budget or even meaningfully bring the deficit down to like 2 or 3% of GDP, then you would want to sell gold. But I assign a very low probability to that. I think it’s like a 2 or 3% chance of that happening. So.
Monetary Metals
And what do you think about this idea that we had all this kind of groundswell of support for this DOGE, Department of Government Efficiency? We’re going to cut these budgets, we’re going to cut all the fat that’s there. We’re going to get all the fraud out. And basically, with the most popular guy on the planet, Elon Musk, with the most money on the planet, followed by, you know, this kind of groundswell support for Trump after the election, and they still really could get basically nothing done. Do you think that that, in a way, is kind of the signal you would need to say, hey, this opportunity where the government’s going to get their budget in order is basically done? If Doge couldn’t do it, nobody could do it.
Jared Dillian
Yeah, that’s a good way of putting it. And it’s not even really a question. That’s more of a rhetorical question. You know, in 2024, when Doge started, like, I was very bullish on Doge. I was excited about it as was a lot of other people. And I think Elon just got a little too close to the fraud, and I think he was asked to step back because if that had been allowed to follow through to completion, I think we could have cut the deficit significantly. I think we could have cut almost a trillion out of it, but that wasn’t allowed to happen.
So yeah, you know, Lyn Alden is a friend of mine and she likes to say nothing stops this train. I don’t want to say nothing stops this train because like I said, look, something could stop the train. And I’m old enough, right? So I’m 52 and I went I was in grade school in 1984. I was in 4th grade in 1984. And we used to do this current event stuff in my class. They had film strips back then. They used to bring in film strips and they used to do current events for the 4th graders. And I remember this was in Reagan’s second term. And basically whatever left-wing outlet put these things together was super focused on the deficit. So at the time, the deficit was like $180 billion.
It really, as a percentage of GDP, it was about the same. It was like 6 or 7%. And they put up these charts of the deficit growing off into the distance. And obviously that turned out to be wrong. You know, George H.W. Bush raised taxes a little bit and then Clinton raised taxes a lot. And we had this big stock market boom in capital gains taxes and the budget ended up balancing. So, you know, I think it’s a little glib to say nothing stops this train. I just want people to keep an open mind. That it really doesn’t take much to fix the deficit problem. It’s not as if we have to balance the budget.
I don’t think we can balance the budget. If we drop the deficit below the rate of growth, like if we have a deficit of 3% and we’re growing at 4%, and we do that for 20 years, we grow out of the deficit. And the reason I brought that up about 1984 is people were focused on it and we had the political will to do something about it. And now nobody cares because the debt is really an abstraction and people don’t see how this government debt affects them personally.
And nobody’s been able to stand up and say, look, I can tell you how this affects you personally. You have a 7% mortgage. If we hadn’t run up $5 trillion of debt in the last 5 years, then you would have a 6% mortgage because public borrowing crowds out private borrowing. But nobody’s been able to make that argument. And so people don’t understand how the debt affects them personally and they don’t care. Right. And that’s why nothing’s happening.
Monetary Metals
And what do you think will be a catalyst for something to happen? Will it be that Social Security benefits have to be cut in a certain way? Will it be that bond yields spike? Will there be a certain catalyst or will this be a kick the can down the road? We’ll have 7% mortgages instead of 6% mortgages. And in general, people just say, oh, the debt’s too much, but We never really do anything about it. Is there going to be a catalyst moment, or is this kind of a boiling frog moment?
Jared Dillian
I think it’ll be a catalyst moment. I think it’ll be bond yields. Now, first, let me say that I’m not bearish on bonds in the short term. I think interest rates are actually going to come down. I think interest rates right now are not a function of the deficit. They’re not a function of supply. They’re really a function of growth and the fact that, you know, we have all these hyperscalers that have issued a trillion in debt, which is actually private borrowing crowding out public borrowing, which is really fascinating.
So I think it’s a function of growth. But let’s say 5, 10 years from now, the debt is 200% of GDP and we’re running 10 to 12% deficit to GDP, and the government gets a margin call and 10-year yields go to 8%, 10%, 12%. And that’s where the Treasury and the Fed have to come together and do yield curve control. And that’s when gold goes to $10,000, $20,000, $30,000, whatever. So the thing is, is that I think we’re a long way from that happening. Like, I don’t think that’s going to happen this year. I don’t even think it’s going to happen in 5 years. I think it’s really, actually, I hope to be gone when it’s, by the time it happens. So.
AI investment and the risk of overcapacity
Monetary Metals
And I want to ask you about the AI because you mentioned these hyperscalers, you know, in some ways crowding out the public with these private investments. How important is it that the AI, if you want to say hype train or the AI bubble, or just even the AI CapEx, if you actually believe in how this infrastructure is going to be built out. How important is it that that AI investment thesis works out to a T, or is it the type of thing where, well, listen, some people are going to work out, some people aren’t going to work out, but in general, the idea of AI growth, how important is that for this narrative going forward?
Jared Dillian
I mean, it can’t work out. Like, by definition, this is capitalism, so it’s going to get screwed up. And I don’t mean that as a pejorative statement on capitalism, but in capitalism, you have boom and bust cycles and you have overinvestment, and that’s what’s going to happen. I’ll answer your question with a question. Do you think we’re going to build the right amount of data centers? Do you think we’re going to build the right amount of chips?
We’re going to manufacture the right amount of chips? Of course not. Like, we’re going to make way too many. We’re going to have way too many data centers, way too many chips. The price is going to crash. This is what happened to optical networking in the dot-com bubble, right? If you remember these companies like the big telecom buildout and Global Crossing and AT&T and Verizon and WorldCom and stuff like that, in the late ’90s, 2000, we built out this massive telecom infrastructure, which we built too much.
Now, 25 years later, it’s being used, right? But basically prices crashed and we had a depression. And if you go back and you look at all these investment booms over history, it’s the infrastructure builders that generally don’t do very well because inevitably we build too much and you have overcapacity and prices crash. So what does that mean for gold? Well, I’m not really sure.
The Awesome Portfolio explained
Monetary Metals
I want to ask you now about this idea of the Awesome Portfolio in today’s day and age. Is there anything about the Awesome Portfolio that people should think about considering, hey, maybe I need to adjust this or that? Or is the whole point of the Awesome Portfolio, listen, it doesn’t matter what’s going on with AI or stocks or gold right at this moment. In general, as long as you’re invested in, you know, some mixture of a diversified basket of assets, the Awesome Portfolio, the whole point of it is it lets you sleep at night, or is there something going on today that makes you think actually maybe it’s important to rethink or rejigger that portfolio slightly?
Jared Dillian
Okay, so here’s the book, The Awesome Portfolio. Highly recommend you get the book. So the Awesome Portfolio is 20% stocks, bonds, cash, gold, and real estate. 20% gold. And the whole point of it is that you don’t have to do any of the brain damage around thinking, like trying to time the market. And it just works. The Awesome Portfolio has historically returned 9% over time with half the volatility of the stock market. And the biggest drawdown it’s ever had is 12% in a year.
So really what you’re doing is you’re trading 1% in growth for cutting your volatility in half and eliminating drawdown. When I explain that to people, initially people are really, they’re super focused on returns. They’re like, well, it’s going to return less than the stock market and I want more. And then I explain, look, you get half the volatility and the drawdowns are practically gone. And they’re like, well, that doesn’t sound so bad. So it really, what it is, is it is the optimized linear combination of asset classes that maximizes your return per unit risk.
It’s got the highest Sharpe basically of any possible combination of portfolios. It just works. I wish the book was doing better. I mean, it’s doing fine, but it’s not The Psychology of Money. I would love to sell 6 million copies of this because I really believe that this would help a lot of people out. And I think that the way that people save and invest for retirement is really, really dumb, which is they basically put all their money in the S&P 500 and they have this massive volatility. And then they experience all these emotions from this volatility, and either they stop themselves out of the trade, they just puke, or they’re just miserable during a giant drawdown. And I just want to prevent that from happening. So this is the portfolio that will make you happy. So.
Monetary Metals
Maybe it’s not only the Awesome Portfolio, but also the Happy Portfolio. I want to ask you about Morgan Stanley has recently come out and said, hey, maybe the idea of a 60/20/20 portfolio with the 20 being split between gold and bonds might be an interesting thing for investors to focus on. How close are we getting to these kind of major investment firms basically saying, hey, the 60/40 is dead and something like an Awesome Portfolio with gold or real estate is kind of the next, if you want to say, benchmark portfolio? How close are we to that world?
Jared Dillian
I definitely think that’s a good thing because people are overinvested in stocks. And you mentioned 60/20/20, like 60% is still way overinvested stocks. So I forget the exact percentage, but I think 62% of the population now owns stocks. And everyone’s like, oh, this is amazing. It’s democratization of investing. Everybody owns stocks.
Like, and we’re giving out the Trump accounts now. So we’re going to get it up to 100% of people that own stocks. I really don’t think most people should be investing in stocks because they don’t have the risk management skills. They don’t have the emotional constitution for it. I think at most 25% of the population should be investing in stocks. And I think most people should be either in bonds or a bank account, right? Or The Awesome Portfolio, like just leaving that aside for a second. But yeah, like stocks are risky. So.
Investing habits and portfolio anxiety
Monetary Metals
How do you think about this idea for someone depending on their age bracket? So let’s say someone’s been doing the 60/40, they listen to this podcast, they buy The Awesome Portfolio book, they read it and they Oh my gosh, I should have been doing this the whole time. You know, I have to check my stock portfolio and it gives me heart palpitations. This is the cure to my, you know, overchecking or overtrading disease. How important is it to kind of start early with these good habits like an awesome portfolio, or is it something that really almost at any time you could switch over and kind of get this stress-free investing lifestyle?
Jared Dillian
No, anytime you can switch over. You know, I teach at a university and this semester I assigned the book in my class and the kids are actually reading it right now. Yeah, like, I mean, the reality is that People spend much more time focused on investing, like way out of proportion to their skill in investing. You know what I mean? I really don’t think somebody who is like a real estate agent or an HVAC guy should spend 10 hours a week thinking about their investment portfolio. Like, I think that’s a bad idea. I think they should focus on doing HVAC or real estate investing and not focus on this.
Because reality is most people are bad at it. So the solution is something that you don’t have to think about. You can just set it and forget it and rebalance it once a year. And it kind of gets you out of this doom loop of like checking your phone every 5 minutes to see what the stock market is doing. There was some research done on this. If you check your portfolio once a day, then there is a 48% chance you are going to get bad news.
If you check your portfolio once a year, there is a 26% chance you are going to get bad news. And really, like, nobody wants to open up their phone and feel bad, right? Like they’re losing or they’re doing something wrong because that negative feedback really influences a lot of bad decision-making. So the less often you check your portfolio, the better.
Does your home count toward your allocation?
Monetary Metals
I want to ask you kind of an important point about the Awesome Portfolio. Obviously, real estate makes up one of those 20% buckets. If someone already owns real estate, or if you want to say they’re already heavily exposed to real estate because of their house or their mortgage, should that count, that property that they already have, towards their 20% real estate allocation? Or if they have some gold coins in the basement, should those count towards their Awesome Portfolio? Because you’ve mentioned this idea of a life hedge. Hey, if your life is going really well and your stocks are doing really well, you really don’t want the opposite where all of a sudden you lose your job, The economy’s not doing so hot, so your stocks fall. How important is it to think about the things you already own outside of your portfolio?
Jared Dillian
In the book, I talk about this. Actually, this is an interesting point in history, and this gives you an idea of how overinvested people are in stocks. But right now, equities make up a higher percentage of people’s assets than real estate, which is the first time this has happened in history. It’s never happened before. Usually, most often, people are overinvested in real estate, and it’s because of their primary residence.
So the average person might have a $400,000 house and they might have $80,000 in equity in the house, and then they have like $50,000 in liquid investments like stocks and bonds. So they’re way overallocated to real estate. And the goal then is to bring up your other asset classes. So you invest more in stocks, you invest more in bonds, you invest more in gold, and, and you put more in cash. So most people are overallocated to real estate. Nowadays, maybe not so much. I think people are more allocated to stocks. But yes, your primary residence or any other real estate investing stuff you’re doing should count as your real estate allocation, so.
Monetary Metals
What happens if you add productive gold to a portfolio? The Case for Gold Yield explores the potential effects that gold yield can have on returns and diversification, and it makes the case for considering productive gold alongside more traditional income-producing assets. Interested in seeing how the numbers stack up? Click the link to download your free copy.
Why investors resist owning more gold
Monetary Metals
What do you think about this idea that gold is kind of one of those assets that in general people feel uncomfortable with? If you look at the portfolio allocations to gold for institutional investors or family offices, or even just regular investors, it’s generally 1 or 2% at maximum. Why do you think people have such an aversion to holding gold in such high proportions? People hear, oh my gosh, I have to have 20% of my portfolio in gold. What do you think is in the psychology of investors that makes them so uncomfortable having, you know, a sizable portion of their net worth in gold?
Jared Dillian
I really think it’s just contempt prior to investigation. Like, gold is about the same volatility as stocks, about the same. But the magical thing about gold is that it has a zero correlation to practically everything, right? Which makes it a fantastic diversifier. I’ve talked about the whole Dennis Rodman story and how gold is like Dennis Rodman. So I don’t understand the antipathy towards gold. I mean, the reality is like 20% in gold does not sound like a lot to me.
But like you said, most people are like, well, you know, you have 2 or 3% and that’s all you want. Like 2 or 3% gold doesn’t do anything. Like it’s not going to diversify anything. But the same people who say that 20% gold is too high, think that 60% stocks is not high enough. And I’m like, I do not understand this at all. Like, I don’t know where this comes from. So people just have like an irrational fear of it. They don’t understand it. I mean, I really don’t have the answer to your question. I don’t.
Monetary Metals
We wrote an interesting white paper called The Case for Gold Yield in an Investment Portfolio. Obviously at Monetary Metals, we offer a yield on gold paid in gold for our clients. And one of the interesting things we’d said is, okay, if you add gold to a portfolio, just a regular 60/40, how much does that help with the volatility, the Sharpe ratio, the returns? And then of course, adding a yield on gold, how much does that help additionally?
And what we notice is, like you said, you can get into far into the double digits, even up to 20%, where that gold really does help in the volatility, the Sharpe ratio. It’s really helpful. But for some reason, investors have this, if you want to say, mindset or contempt for gold before actually looking at it. Are there other assets where you feel like investors just kind of already have a, if you want to say, bias against that asset class that you think is incorrect?
Jared Dillian
No. Like crypto, like people are friendlier to crypto than they are to gold. You know what I mean? And the funny thing is, is that gold, I think, makes up 2% of investable assets in retail portfolios. It could easily go to 5 or 10%, and it probably will. Like if gold goes to $10,000, you’re going to see that percentage of people’s portfolios, it’s going to go way higher. It’s going to suck a lot of people in. But yeah.
Where silver fits in a portfolio
Monetary Metals
Last question before we get to this rapid-fire round. I want to ask you about silver because at Monetary Metals, we also do silver as well, where we pay yield on silver. And we have some clients who are completely gold bugs. They don’t touch silver at all. We have some clients who are only in silver and don’t touch gold. And then we have some clients who do a bit of both. How do you think about allocating to silver versus gold? Obviously, you mentioned gold in the awesome portfolio, but silver has a bit higher volatility, but maybe better returns. How do you think about having silver in place of gold or maybe having both in a portfolio?
Jared Dillian
Actually, the funny thing is I didn’t mention it in the book at all. I think there’s a place for silver in every portfolio because silver is what I call a right tail asset, right? So you look at these points in history like 1980, 2011, just earlier this year, silver can go 5x in a hurry or 10x. And so when I say a right tail, I mean the right tail of the distribution, right? So it has a big fat right tail. So, you know, silver ran up to $120 and now it’s trading about $50.
Super disappointing if you didn’t sell at $120. But the point is, is that having an asset like that in your portfolio can be super helpful. You know, even if it’s 2% of your portfolio, if something that’s 2% of your portfolio goes 5x, it’s now 10% of your portfolio and it really helps your returns. You know, So look, I think silver should be trading at $100, $200 an ounce. I don’t really have an opinion as to when it’s going to get there, but I always own some, you know, and I did sell a little bit when it got to $120, not as much as I should have. So.
Monetary Metals
I want to ask you about having maybe some asset that you almost see as like play money, right? You know, you have your Awesome Portfolio and you know you’re not supposed to trade it, but you really have this trading itch. You really think you’re smarter than the average bear. And so you say, you know what, on the side, I’m just going to put $1,000 and use it on prediction markets, or I’m going to use it on sports betting. What do you think about this idea of kind of having a little dessert so that you keep your diet very strict? What do you think about this idea in investing?
Jared Dillian
Yeah, I think a lot of finance is entertainment, actually. I have this whole theory that finance is entertainment. I mean, this is why I have a job as a newsletter writer. Like, I’m really entertaining people. Like, yes, like they read it, I bring up interesting points and they feel smart, But really what it is, is kind of like entertainment and people like to invest and trade recreationally, like it’s fun. So I don’t really see anything wrong with that. But, you know, I would caution people against trying to make a living doing that because there’s a lot of people with physics PhDs working at quant shops that make $20 billion a year that you’re going up against and you are just hopelessly outmatched. So just keep it recreational. Just screw around money, play around money, whatever, and that’s totally fine. So.
Rapid-fire questions
Monetary Metals
All right, Jared, I want to get us into a rapid-fire round. I’m going to ask you questions from all over the map. You can answer as short or as long as you’d like. Our first rapid-fire question, would you say that we’ve hit peak 60/40 portfolio popularity?
Jared Dillian
No, we did that in 2022. I actually think 60/40 is going to come back. People became disillusioned with the 60/40 after 2022 when stocks and bonds were both down 20%, but 60/40 is coming back.
Monetary Metals
I want to ask you now about the awesome portfolio. Obviously, there’s different assets that make up the awesome portfolio. If you had to swap out one of the assets in the awesome portfolio, which would it be? And which of the assets in the Awesome Portfolio could you not live without?
Jared Dillian
I would swap out stocks and put it into bonds at this particular point in history. That’s what I would do. So
Monetary Metals
Next question for you, which is about the S&P 500. Obviously over time it has some average return. Do you think we’re in a period where that average return is going to seem high or low in the future?
Jared Dillian
Oh God, totally high. Yeah. I mean, I think over the last 50 years, the S&P has returned 11% a year. I think in the last 10 years it’s been like 15% a year. not sustainable. I think we are headed for one of those decades where returns are zero for 10 years or more. I think we’re headed for that. So
Monetary Metals
What is the worst financial advice you think most investors agree with?
Jared Dillian
Definitely put all your money in index funds, the S&P 500. That’s the worst advice. I mean, look, historically it’s worked out great for the last 20 years, but going forward, I don’t think that’s going to be good advice.
Monetary Metals
Next one for you. What’s a market prediction that you got absolutely right and a market prediction you got absolutely wrong?
Jared Dillian
So one that I got wrong was I was bearish on health insurers when Obamacare was passed, which might be the dumbest thing I’ve ever done in my career. Like, we just passed this law that says everybody has to buy health insurance or pay a fine, and I’m bearish on health insurers. That literally was the dumbest thing I’ve ever done. They’re 10x more. They’re like 20x since then. I can’t even believe how stupid I was. My, in my defense, I was 34 years old and I just didn’t know my ass from a hole in the ground. I’m going to skip the one I got right because it’s not even worth talking about. Just keep the one I got wrong.
Monetary Metals
Next, I want to ask you about DJing. So if people don’t know, you’re a very famous DJ. We love seeing on the Twitter all the cool places that you get to DJ. What is something that you can learn from the DJing experience that you can bring to investing and then vice versa? Oh,
Jared Dillian
It’s just the behavior of crowds. You know what I mean? Look, I’m not super famous, but I’m at the point in my DJ career where I’m really providing support for headline DJs. So I’m like the opening DJ and my job is to warm up a room, right? So it starts with an empty room and people are trickling in and I have to build the energy over 2 hours to get them warmed up and ready to dance for the headline. That’s very hard to do, right? But just like a nightclub needs to be warmed up, so does the market, so does the stock market. And eventually you’re going to get to a point in the night where there’s a climax and then people drink too much, then they go home and it kind of falls off after that. There’s really a lot of parallels to investing.
Monetary Metals
What do you think is the nature of this boom-bust cycle? Of course, we’ve talked about it. Yeah, capitalists will invest in something, there’ll be this great boom, and then we realize, oops, we invested a bit too much. What do you think is the nature behind that boom-bust? Is it investor psychology? Is it Fed interest rates? Is it something else entirely? What is the nature of this boom-bust cycle we seem to consistently see?
Jared Dillian
No, it’s all psychology. I mean, it’s, you know, goes all the way back to the, you know, the Dutch tulips. Like it’s been around for 500 years. So no, it’s just human nature. I mean, that’s kind of my whole thesis about investing, like generally. is fundamental analysis is backwards looking. Technical analysis is backwards looking, but human behavior follows patterns and it’s repeatable over time. And you can pinpoint tops and bottoms with a lot greater accuracy using sentiment and psychology than you can with any other method.
Monetary Metals
Next rapid-fire question for you. What’s a book that you think investors should read that’s not an
Jared Dillian
Probably my favorite non-investing fiction book is a short story collection by a guy named Barry Hannah. It’s called Airships. It was published in 1980. Barry Hannah, he passed away about 10 or 12 years ago. Just an absolute literary genius, and most people don’t know about him.
Monetary Metals
All right, next question for you. You’ve argued in the past that people should pay down debt, even including relatively low interest rate debt. Do you still agree with that? And how should investors determine whether paying down their debt is more valuable than investing?
Jared Dillian
It’s funny because in my class, I have a question on the exam and I say, you have a 4% mortgage. Would you rather pay down your mortgage or make 8% in the stock market? So really what I’m asking is, do you want a 4% certain return or an 8% uncertain return? And really it’s a question about risk tolerance, right? Now it’s funny, you know, I’ve been teaching this class for 13 years and over time the students have gotten more risk averse. Like it used to be, it was like half and half.
Some people would pay down the mortgage, some people would invest. This last class out of 30 students, 28 said they would pay down the mortgage and only 2 said they would invest. They’ve gotten a lot more conservative and I don’t mark the question right or wrong. I really just, you know, want to see their opinion. But having said that, I fall under the category of paying down debt for a whole bunch of reasons, which I talked about in my other No worries. But I’m very close to paying off the mortgage on my house. I can’t wait for it to be done.
You know, I’ve paid off a couple of houses in the past and it’s the best feeling in the world. So
Monetary Metals
What can investors do to try to understand their own psychology a bit better? Let’s take maybe 2 distinct people. One is a completely rational investor. They say, I know the volatility’s going to be crazy, but I’m going to be 99% stocks because I read in some textbook that that’s the best move. And then you’ve got someone who is a complete worrywart. They think, oh my gosh, if my Portfolio falls even by 5%, I’m going to be awake all night thinking about it. And maybe they should be more towards an awesome portfolio. How should investors maybe self-analyze so they know which of those portfolios or which of those allocations they might be more interested in?
Jared Dillian
Basically, the way people invest is they think about returns first, and then they think about the risk. So they might see some aggressive growth mutual fund that’s returning 25%, and they say, well, I like 25%, and they invest in that. And then it moves around at 4% a day and they don’t like that very much. So people get in trouble because they think about the returns first and the risk later. They should think about what risks they’re comfortable with first and then kind of reverse engineer the returns out of that, right? So if you’re only comfortable with 2% volatility, then maybe you should invest in a 2-year note or something like that.
Monetary Metals
What do you think about this idea of adding leverage to a portfolio like the Allson portfolio or a diversified portfolio? I spoke with Rodrigo Gordillo, and one of the things he said is, hey, listen, if you have this portfolio that has slightly lower returns, but the volatility is really low and the risk is much lower than, say, investing in stocks, by adding a little leverage, people feel like, well, I’m getting that boosted return and my volatility really isn’t that much crazier. How do you think about adding leverage to a portfolio, this kind of diversified portfolio we’ve been discussing?
Jared Dillian
I’m generally opposed to it. You know, when you add leverage to something, what you’re doing is you’re increasing your risk of ruin, right? So if you invest without leverage, if you just invest with cash, if you have a 100% drawdown, then you’re bankrupt, right? So, but if you apply 2 times leverage to that, if you have a 50% drawdown, you’re bankrupt.
If you apply 3 times leverage to that, then a 33% drawdown and you’re bankrupt. 4 times leverage, 25%, et cetera. And look, like, you know, 50% drawdowns happen, 25% drawdowns happen. I really don’t want to be in a position where I’m getting a margin call on something. So I generally, you know, I don’t even use options very often, just very occasionally. And when I do use them, I’m typically long. So I just don’t use a lot of leverage. Obviously I have a margin account for, you know, selling short and stuff like that, but I just, I don’t do it. So
Monetary Metals
Last rapid-fire question for you. What’s something you would have to see to say, wow, this Awesome Portfolio is not awesome. I was totally wrong.
Jared Dillian
I would have to see everything get murdered all at the same time, like stocks, bonds, cash, gold, and real estate. And cash can’t get murdered. But really, I would have to see everything have a sustained bear market at once. And the only time that we’ve gotten close to that actually was in 2022. That was the worst year. And that was when interest rates went up a lot. So I think the portfolio is somewhat vulnerable to rising rates. But even if you have rising rates, something should still be working. So, you know, I backtested this back to 1971, and there’s never really been a sustained period in time where nothing in the portfolio was working at all. And I think 54, 55 years is a pretty good sample size. So
Monetary Metals
yeah, I actually wanted to follow up on that. Do you think that because of, if you want to say, the monetary regime that we’re in where we’re under a fiat currency system, we’re not really tied to gold in any meaningful way, do you think that that has changed portfolio investing in any meaningful sense, or do the same kind of rules and principles apply basically no matter what type of regime you’re under?
Jared Dillian
That’s a question we should all be asking ourselves, right? So like if we went to a gold standard, which is probably not going to happen, but let’s say we did, what would change? Right? Well, stocks probably wouldn’t go up 10% a year. Bonds would probably be your best investment. You know, Meb Faber, I’m probably going to misquote him, but he did some research on this and he was like, look, there’s been periods of time in US history where the stock market has not been the best performing asset class.
I think it was from 1860 to 1920, bonds actually outperformed stocks for like a period of 60 years. And a lot of that was during the gold standard. Right? So I mean, that is a very worthwhile question to ask. The only thing is, is that we’re going to be in this regime for a really long time. Like, I don’t see it changing anytime soon. It’s kind of fun to think about. It’s not really useful in practice. Well,
Monetary Metals
For those interested in getting on their own gold standard, they can check out Monetary-Metals.com. All right, Jared, second to last question for you. What’s a question I should be asking all the future guests of The Gold Exchange Podcast?
Jared Dillian
Well, you should ask ’em about the Awesome Portfolio. Find out what they think.
How Jared invests his own money
Monetary Metals
Okay. Now I’m going to turn it around on you. How close is your personal portfolio to the Awesome Portfolio?
Jared Dillian
It is. I’ve had some variation of it for many years, but I do overweight and underweight certain things. So at the moment, I’m very underweight stocks and I’m very overweight bonds and gold, and I’m underweight cash, which is not good. I need more cash and I’m overweight real estate. Just by virtue of the house that I’m living in. But I’ve had some variation of it. I used to be massively overweight gold and I had, for a while I had no bonds whatsoever, but I went from 0% bonds to 30% bonds in the last 6 months. So yeah, I just do it with minor modifications.
Monetary Metals
I want to ask you maybe a clarifying question. So at Monetary Metals, the clients own physical gold, they earn yield in physical gold. How important is it the type of gold that you own in the awesome portfolio? If someone says, listen, I want to be able to trade in and out pretty quickly, or when I rebalance, I want to be able to use an ETF. How important is it to have a certain type of gold in the Awesome Portfolio, whether it’s mining stocks or physical gold or gold with yield? How important is that type of allocation to the Awesome Portfolio?
Jared Dillian
I mean, all the, all the backtesting I did with physical gold, so either actual physical or the ETFs like GLD and IAU and stuff like that, I didn’t do any testing with miners. Not to say that owning some miners isn’t a good idea because miners can give you a lot more upside than actual gold. And the actual physical is a pain in the butt because the transactions costs are so high and then you have it in your house. And look, I’m not one of these like gold maximalists that say, no, you should only have physical gold in your possession. Like, I think there’s a lot of different ways to own gold, including miners. So the ETFs are liquid. The transactions costs are basically zero. And unless something really weird happens underground in London, the gold is probably yours. So,
Monetary Metals
Okay, Jared, my last question for you. People obviously want to go buy The Awesome Portfolio, but where else can they find more Jared Dillian?
Jared Dillian
You can go to jareddillianmoney.com. That’s where I have all my newsletters and I have an options masterclass and a bond masterclass, a bunch of educational stuff. You can check out the Daily Dirt Nap at dailydirtnap.com or at jareddillonmoney.com. And like I said, you should get the book, The Awesome Portfolio.
Monetary Metals
Jared, as always, it’s a pleasure interviewing you. For the audience, we’ll see you next week, and you should have read The Awesome Portfolio by then.
Jared Dillian
Thank you.
