The Problem with Your Portfolio

A quick note before we start: Over the next three months, in place of some of the usual Jared Dillian Letter issues, I’m going to do something I’ve never done before: serialize my new book, The Awesome Portfolio. You’ll get five excerpts of it ahead of the September 8 release, courtesy of yours truly (and my publisher).

You guys are the only people on the planet getting this. I’d love to hear what you make of it as we go—just be aware that the writing has been condensed, with passages redacted, for length.

We’re shooting for the New York Times Best Seller list. We almost got there with No Worries. Let’s lock it in this time. Also, this book blows to smithereens the conventional wisdom about saving for retirement. So, if you like what you see and want the full blueprint, smash the preorder button.

Now… let’s kick it off and talk about the problem with your portfolio.

The Problem with Your Portfolio

There is a better way to invest, you know…

The profession of economics assumes that people are rational actors. But frequently, they’re not. My experience with people in and out of finance has proven to me that they are highly irrational, no matter how rational they claim to be.

The interesting thing is that these emotions cause people to behave in very predictable ways that are repeated across history. If you can understand human emotions, you can understand all of finance.

So let’s start there. When you buy a stock or a mutual fund, you are optimistic. Nobody is pessimistic when they take risk—they always think it is going to work out in the end.

Ultimately, the stock peaks, and corrects sharply. At this point, you’re thinking, “Well, maybe this is the top, but if it just gets back to the previous high, I will sell.”

After sitting on a big pile of gains, you turn it into a big pile of losses, and ultimately you sell, when you are completely demoralized. And then the stock goes up. I see this repeated over and over again in the capital markets.

We are not rational economic actors. We are wound-up balls of anxiety and depression, and we usually invest out of a place of fear. People say that greed rules the markets—well, greed is simply another kind of fear.

Stress is the enemy of good decision-making. The thinking with index funds is that you can plunk your cash in there and forget about it and pick up your bag of money when you retire, but frequently, it doesn’t work out that way, because of the volatility.

I have a theory about this—more information is usually worse than less information. If you get information on your portfolio every day, there is a 47% chance of getting negative feedback—the market is down roughly half of the time. If you check your portfolio once per year, there is only a 26% chance of getting negative feedback.

Index funds are not safe. The stock market is not safe.

The conventional wisdom is that you put all your money in low-cost index funds, which return more than anything else, and then ride off into the sunset with your retirement winnings.

How is that working out?

This is the biggest problem: when you invest in an index, you get the returns of the index—which are great—but you also get the volatility of the index. And volatility is your enemy. The purpose of volatility is to make you make stupid decisions.

The models assume that you are exhibiting perfectly rational investor behavior and dollar-cost averaging perfectly over time. In practice, nobody does this. Your actual returns are therefore likely to deviate from those of the index, perhaps significantly.

I saw it happen just a few years ago, in the pandemic. The stock market was down 35% in a month, and lots of people couldn’t hang on.

What you really need to be concerned with are the great bear markets—four times in the last hundred years, stocks have gone down about 50% or more. And how you behave at that particular moment will determine your financial well-being for the rest of your life.

My issue with the index fund people is not about indexing... but that what is sold as diversification is actually insufficient diversification.

So you hire a financial advisor. And the sole purpose of the financial advisor is to tell you not to sell. You pay him 1% for the privilege.

I've been thinking about a better way since 2008. I was a trader at Lehman Brothers... I got cut in half. From that moment on, I resolved to never get cut in half again.

You can be rich or you can be happy. Do you want to be rich or do you want to be happy? There is a middle way. You can be pretty rich and you can be pretty happy.

Even a little bit of diversification across asset classes helps. I am arguing that people have too much in stocks, that they should have less, and that they should put their money in other stuff.

Just like you have to be diversified across asset classes, you also have to be diversified internationally. What if—just saying—the US someday turns into an economic hellhole, and France has a free-market revolution and starts clocking 8% growth? Would you really want to be all in US stocks? Now, there is nothing like that on the horizon, but the whole point of diversification is that you never know, as Joaquin Andujar once said. People are pretty convinced of US economic dominance at this point—I am more skeptical.

Adapted from 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. 

Next time, I’ll get to the heart of what this book is really all about: the Life Hedge.

Jared Dillian, MFA