On the morning of the Lehman Brothers collapse, Jared Dillian, who ran the firm’s ETF trading desk, walked past TV trucks and a crowd of reporters to get to the trading floor. He looked around at the chaos, took off his tie, and figured he wouldn’t be needing it anymore.
That week, about half a million dollars of his restricted Lehman stock went to zero. Some of his colleagues, who had loaded up on discounted shares through the company’s stock purchase plan, lost roughly 80% of their net worth.
Jared came through the Lehman Brothers collapse in a different position. He had lived far below his means, with a cheap house, a small mortgage, and no vacations, so while colleagues grabbed whatever job they could find, he had the cash to walk away and start his own newsletter.
In this episode, he explains the lessons from the Lehman Brothers collapse that still shape how he invests. He covers why he treats cash as an option rather than a drag on returns and how a simple five-way split across stocks, bonds, cash, gold, and real estate has historically cut volatility roughly in half.
He also shares a Las Vegas test for finding your risk tolerance, explains why he thinks buy-and-hold investors haven’t faced a real bear market since 2008, and gives his outlook on bond yields, inflation, and Social Security.
Key Takeaways
The biggest ideas from the conversation
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- Cash gives you the freedom to bet on yourself: Jared’s coworkers earned the same Wall Street paychecks, but many spent them on pricey apartments and weekend golf. Because he lived cheaply, Jared came out of the Lehman Brothers collapse with enough liquidity to skip the job he was offered and start his own newsletter instead.
- A smoother ride beats the highest return: Jared focuses on risk-adjusted returns rather than raw returns, because the S&P 500 fell 57% from 2007 to 2009 and investors who panic-sell near the bottom lock in that loss. A portfolio built to reduce volatility makes it easier to stay invested when markets drop.
- Split your portfolio five equal ways: Jared’s Awesome Portfolio holds 20% each in stocks, bonds, cash, gold, and real estate, rebalanced once a year. In backtests going back to 1971, it has returned about 9% annually, a point or two below the S&P 500, with roughly half the volatility and a worst year of −11.8%.
- Test your risk tolerance at the craps table: Jared’s gut check is to go to Vegas and notice how much you’re willing to lose before the pain makes you walk away. Despite a career trading on Wall Street, his limit is a few hundred dollars, while some friends will put $10,000 on the table.
Resources
Links, tools and references mentioned
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Free Asset Location Guide
Before you add bonds or real estate funds, know which account they belong in. This free guide covers what to hold in tax-deferred, tax-exempt, and taxable accounts.
Download the free guide
Jared Dillian’s Website
Jared’s research services and market newsletter.
jareddillianmoney.com
The Awesome Portfolio by Jared Dillian
Jared’s book on the simple five-asset strategy he built after losing $500,000 in the Lehman Brothers collapse.
Get the book
Jared Dillian on X
Follow Jared for ongoing market commentary.
@dailydirtnap
Chapters
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Note: Timestamps are approximate and may vary across listening platforms due to dynamically inserted ads.
| 02:29 |
Walking into Lehman Brothers the day it collapsed |
| 04:38 |
The $500,000 in company stock that went to zero |
| 06:57 |
How cheap living let him start a business instead |
| 19:54 |
Why buy-and-hold hasn’t faced a real crash since 2008 |
| 22:52 |
The Las Vegas test for your risk tolerance |
| 27:07 |
A five-way portfolio that fell just 9.8% in 2008 |
| 28:46 |
The one scenario where this portfolio struggles |
| 29:33 |
Is 20% cash too much with inflation? |
| 44:45 |
Why bond yields are the economy’s warning light |
| 51:25 |
Why half of retirees claim Social Security at 62 |
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