The Life Hedge

Note: As I mentioned last month, in place of some of the usual Jared Dillian Letter issues, I’m serializing excerpts from my new book, The Awesome Portfolio. This is part two (out of five parts) that you’ll receive ahead of the September 8 release.

Last month was all about the problem with your portfolio. In this issue, we’re tackling the most important idea in the book: the Life Hedge. As always, hit reply and tell me what you think.

The Life Hedge

You have a job. Selling nozzles or something like that. The nozzle business is pretty good. You are making $100,000 a year, you max out your workplace retirement account with Nozzles, Inc., and you have a nonretirement brokerage account, too. You’re in the middle of an economic expansion, the nozzle business is growing, the economy is growing, and the stock market is going up. You make more money: $150,000, $200,000, and $250,000 a year. You plow all the money into the stock market. You are now worth a million dollars or more. Everything is great.

Then, the stock market starts going down... you notice that the nozzle business is falling off a little bit. You’re thinking you might not get as big of a bonus this year. The stock market goes down some more. Management is aggressively talking down your expectations of a year-end bonus. You stop making contributions into your retirement account, but all your wealth is tied up in stocks (and the equity in your house), and the balance has gone from $1,000,000 to $700,000. You hear talk about a recession on TV.

Finally, it happens to you—you are called into the office and find out that you are getting let go, with a small severance. The stock market is now down 40%. You actually don’t have much in the way of cash for emergencies—you put it all in the stock market. You think about looking for a job, but the economy is in a deep recession, and there are no jobs to be found.

What is the problem here?

Well, the nozzle guy made a crucial mistake: he bought a bunch of stocks, which will go up when business at Nozzle, Inc. starts getting better. The two things are correlated. If you’re making more money at your job, there’s a good chance that stocks are going up, and vice versa. Stocks are economically cyclical, you’re working some place that is economically cyclical, so they both go up together. When things are going well, you are really, really, really happy, and when things are going poorly, you are really, really, really sad.

I don’t like the idea of being really happy or really sad. I kind of want to be in between, all the time. I don’t need that kind of emotional volatility in my life, and neither do you.

I don’t want to put anyone in a situation where they have to time the market in order to get by. Very few people can do that. I’m talking about structuring your portfolio in such a way that it actually does better when things are getting worse. Believe it or not, it is possible.

The late Charlie Munger, Warren Buffett’s long-time business partner, once said: “If you can’t stomach 50% declines in your investment, you will get the mediocre returns you deserve.”

I will dispute Charlie’s point about mediocre returns—you don’t have to sacrifice returns in the pursuit of lower volatility. At least, not much...

I had a 50% drawdown at one point in my life, and it sucked pretty bad. It was freaking terrible. And I vowed never to let it happen again. Easy for Charlie Munger to say that you’re a wuss if you don’t take 50% drawdowns. Munger was worth $2.6bn when he died. If he got cut in half, he’d still be a billionaire!

Munger also seems to imply that a stock (or a market) that goes down 50% will always come back. There is no rule that says that it has to! I am 52 years old. Stocks peaked in 1929 and didn’t make a new high until 1945. Sixteen years. That would make me 68, about ready to retire. That’s suboptimal.

Sometimes people say to me, you would have made a lot more money if you were in stocks/bitcoin/Nvidia. For sure, that is true. I also would have been an emotional wreck. The goal is not to make the most money. Let me repeat: the goal is not to make the most money. The goal is to make the most money per unit risk.

As the name “Life Hedge” implies, you want a hedge on your life—an offsetting position in something else to cushion the losses in the thing that you own a lot of.

When we get a recession, there is not a lot you can do to protect yourself against it—except to be diversified across asset classes. That is the purpose of the Awesome Portfolio. When you lose your job (which will happen) and your income (which will happen), you don’t want your stock portfolio to be getting hammered at the same time. Financial stress is completely avoidable. It’s all about how you structure your financial affairs.

Adapted from Chapter 3 of The Awesome Portfolio by Jared Dillian, published by Harriman House. The book releases on September 8, 2026, but you can lock in your copy right now in your preferred format.

→ Preorder The Awesome Portfolio today.  

For my next trick: Everyone loves indexing these days, but in part three, I’ll tell you what’s wrong with it.

Lastly, here are the results from part one’s poll:

I’m curious to see the responses on the new one:

Jared Dillian, MFA