The Portfolio Built To Survive Every Crash | Jared Dillian

Jared Dillian's Awesome Portfolio allocates 20% each to stocks, bonds, gold, cash, and real estate. It has returned approximately 9% per year since 1971 versus roughly 11% for the S&P 500, but with about half the volatility of an 80/20 portfolio and a Sharpe ratio of approximately 0.6. The worst drawdown ever recorded was 12% in 2022, and the second worst was 9% during the financial crisis, compared to a 57% decline in the S&P 500 from 2007 to 2009 that turned one million dollars into roughly 430,000 dollars.

Dillian argues the modest return sacrifice is justified because he believes 90% of investors sell at the lows during severe drawdowns, permanently stopping compounding. He contends that index funds are widely but incorrectly perceived as conservative, noting the S&P 500 carries a volatility of 16 and suffered an 89% drawdown in 1929. He attributes low adoption of the Awesome Portfolio partly to investor discomfort with a 20% gold allocation and the perception that 20% cash is too large a drag. He views cash as an option to purchase assets cheaply in the future, and notes that in the late 1970s and early 1980s cash was the best-performing asset in the portfolio when money market funds yielded 14 to 15%.

Dillian argues the Federal Reserve's decision to hold rates was entirely intentional rather than a policy mistake. He attributes the strategy to Warsh, who understood that holding rather than hiking would cause the yield curve to steepen, pushing up long-end rates, ten-year rates, and mortgage rates to produce an immediate tightening effect. Had Warsh hiked instead, the curve would have flattened, which Dillian says would have been stimulative and brought mortgage rates down. He adds the strategy satisfies Trump because Trump focuses on the optics of the Fed funds rate and does not understand yield curve dynamics. An unnamed Fed official cited the objective of tightening via the long end now so that short-term rates can be lowered later.

At the time of recording, 30-year bond yields were approximately 5.18% after reaching 5.30%, and Bloomberg pricing showed 1.7 hikes still priced in out to June of next year. Dillian is positioned long SOFR and twos, reflecting his view that hikes are off the table. He predicts the yield curve will continue to steepen over the next six to twelve months, with Fed funds falling to 3% while the long end stays elevated, and he does not expect Warsh to hike regardless of what the data shows. Recent economic data including payrolls, CPI, PPI, PCE, and JOLTS have all been soft over the past month. He describes Warsh as a profound philosophical departure from Powell, Yellen, Bernanke, and Greenspan, noting Warsh wants fewer FOMC meetings, a diminished Fed role in monetary policy, and has made explicit what was always implicitly true, that the Fed follows market pricing rather than leading it.

Dillian notes that a steep yield curve is good for banks and that XLF, JPMorgan, and major banks are currently at highs, adding it is historically rare for the broad market to suffer a significant correction when bank stocks are at highs. Despite this, he is bearish on financials based on technicals, believing they are topping, and says health care and staples look better, which he acknowledges implies a generally negative view on everything else.

Dillian draws a parallel between the current environment and February 27, 2007, when the ABX subprime index gapped lower by 10 points and China raised reserve requirements on the same day, sending the S&P down 4% and doubling the VIX before the index went on to make new highs in summer 2007 ahead of the full crisis. He views the price action on the day of the recent Fed meeting, when the market crashed roughly 100 handles into the close, as the starting gun of a bear market. He describes the Leopold fund, which reached approximately 45 billion in NAV and was highly levered, as the most leveraged player and a canary for the broader trade, and says the last 13F being spam-refreshed for copy trading was a clear sentiment signal of froth.

Dillian liquidated nearly all of his energy positions in the weeks before recording, after which oil dropped eight or nine dollars. The exit was based on chart technicals rather than a view on the war, and he says the ideal time to sell oil was above 100 or 120, with a second opportunity around 90 where he actually sold. He predicts oil could fall back to 60 or 65 if the war ends. On gold, he says people lining up outside to buy physical gold in January was a clear top signal. He believes gold is currently bottoming and basing, with one more small test below 4000 needed to complete the base, and predicts a move above 4250 would represent a blue sky breakout leading back to prior highs.