This is how it goes: You have a job. The economy is expanding. You get paid more and more. You’re promoted and land bigger bonuses. Things are going great, then a recession hits, you lose your job, spend 18 months unemployed, chew through all your savings, and everything sucks.

But here’s also what happens: You invest in an S&P 500 mutual fund, and during the expansion, it goes up and up, and when a recession hits, your investments get cut in half, adding insult to injury.

You were stressed out before, but now, you’re really stressed out. Everything is terrible. I am not sure why people do this, and 99% of the country lives like this.

Why add additional leverage to your life through your investment portfolio? Life is volatile enough—why would you add more volatility to it? Yes, when things are good, they are euphoric, but when they are bad, they are dreadful. What you are doing is making your life more procyclical, with higher highs and lower lows.

I don’t know about you, but I don’t want higher highs and lower lows. I want things to be smoothed out a bit. I don’t want to increase the amplitude of the sine wave. I’ll accept slightly lower highs if it means I have slightly higher lows.

That, in essence, is my investment philosophy. I call it “The Life Hedge.” I dreamed it up after No Worries came out, but it will be a chapter in my upcoming Awesome Portfolio book. Your portfolio should not make your life more procyclical—it should instead be a hedge on your life.

How Do You Build a Life Hedge?

Well, I usually have some put options (check out the Options Masterclass for more on this). I am usually short some stuff. I usually have gold or commodities. But I am diversified in ways that you cannot imagine, across the world, in various asset classes. Basically, I want to get far away from US stocks, which are very correlated to the rest of my life.

Look, in a real bear market, it is tough to hide—anywhere—but if you can be down 10% while the rest of the world is down 40%, then that is a good outcome.

Not being exposed to US stocks means that I have missed out on a big bull market. That’s okay—I have caught other bull markets, elsewhere. I have never owned a share of the Magnificent Seven, and I am doing just fine. I don’t get FOMO. I don’t get upset when everyone else is making money and I’m not. But I derive a perverse satisfaction when everyone else is losing money and I’m making money.

Look, I am not the world’s best investor. I am not putting up Druckenmiller numbers. In fact, I am probably returning about the same as the S&P 500, just without all the heartache that comes with downturns. Because remember, when things get bad, it’s going to be bad for your portfolio, and it’s going to be bad for you personally.

People tend to forget this because we haven’t had a bear market in a while. In bear markets, everything gets worse. Divorces go up. Substance abuse goes up. Happiness, however you measure it, goes down. Imagine a bear market where your income drops or disappears, but the value of your investments goes up 50%. That is what I try to achieve.

That is actually the hidden lesson of The Big Short—here you had a group of guys who made a big countercyclical bet, and it paid off. Everyone else got poor, and they got rich. I know some other stories like that. You know who did well in the financial crisis? Equity derivatives guys. I heard stories of those guys walking into a Best Buy on the ding-dong lows and buying up the entire store for pennies on the dollar.

That’s not to say that you should be a dedicated short seller—that’s different. Stocks usually go up and to the right, so you do need to have some exposure to something. It is very difficult to make a living as a short seller—plus, nobody likes you. There are only a handful of good short sellers out there, and in bull markets, most of them get wrecked. No way to make a living. It’s more art than science, but the goal is to get some long exposure and offset with hedges.

Hedges are insurance. And it’s funny, because people have insurance on their house, they have insurance on their car, they have insurance on their life, but they don’t have insurance on their portfolio. Hence, the tail risk fund emerged as a way for people to insulate themselves from market crashes, though that seems like an extra, unnecessary step. You can do it yourself; you just have to be strategic about it. Again, you achieve this through hedges, shorts, and very wide diversification.

Counter-Cyclical

Wouldn’t it be nice to be making money when everyone else is losing it? Yes, it is nice.

What if that means when everyone is making money, you won’t be making as much money? That is tough for newsletter subscribers to swallow.

Newsletters come in all different shapes and sizes. Some of them shoot the lights out with tech stocks in bull markets. Some of them try to hide out in value stocks in bear markets. It’s rare that you have an analyst who has a strategy that works throughout cycles.

It’s about the Life Hedge, but it’s also about sentiment. Fundamental analysis will fail you, and technical analysis will fail you, but sentiment never will. When sentiment reaches extremes, there is always a trade, and The Daily Dirtnap is there. I don’t know too many newsletters that have lasted longer than 16 years.

Anyway, don’t make your life more procyclical. Don’t make the highs higher and the lows lower. Subscribe to a newsletter that smooths out the ups and downs because managing your emotional capital is even more important than managing your actual capital. I made this mistake once in my life, in 2008, and vowed to never make it again.

I don’t have the foggiest idea where Nvidia (NVDA) and Tesla (TSLA) earnings are. Don’t care. Don’t really care about valuation either. All I care about is how you feel about a stock, and I can tell you where it is going to go.

Jared Dillian, MFA