Episode 23: The Ex-Lehman Trader’s Case Against Index Funds — Jared Dillian on The Awesome Portfolio
Jared Dillian ran Lehman Brothers' ETF trading desk right up until the firm collapsed in September 2008. A month later, he launched his own investment research newsletter. Nearly two decades on, he's built a case that the investing advice an entire generation was handed — buy the index, dollar-cost average, hold forever — was built for conditions that no longer exist.
In this episode, Joe Withrow sits down with Jared Dillian, editor of The Daily Dirt Nap and author of the new book The Awesome Portfolio, to talk through what he saw inside a dying Wall Street firm, why index funds have quietly become the opposite of diversified, and the five-asset allocation strategy he built in response.
Jared opens with the view from inside Lehman as it died. Management kept telling employees the firm would turn it around. Hedge fund clients — the people with the least incentive to sugarcoat anything — had been saying for months that bankruptcy was inevitable.
By the weekend Barclays bought the iconic broker-dealer for $2 billion and most of Jared's former colleagues walked straight into new jobs. Jared didn't. He started his newsletter instead, and it's still running today.
From there, the conversation turns to the argument at the center of the book: index funds have grown from 2% of assets under management in 1997 to 56% today, and that concentration is precisely what makes them dangerous.
When 150 million people own the exact same instrument, a market shock doesn't stay contained — it becomes a liquidity trapdoor. That's exactly what happened in March 2020, when the S&P 500 fell 35% in a matter of weeks as everyone tried to sell the same thing at the same time.
Jared's answer is the Awesome Portfolio: 20% each in stocks, bonds, cash, gold, and real estate, rebalanced once a year. Backtested to 1971, it's returned roughly 9% annually with about half the volatility of the S&P 500 — and its worst year ever, an 11.8% drawdown, happened during a year the broader market fell far more.
Jared walks through why a zero-correlation asset like gold does more to reduce volatility than most investors assume, why cash isn't the "drag" people assume it is (it was the best-performing slice of the portfolio in the early 1980s), and why an outside analyst running an independent linear-optimization exercise landed on almost the identical allocation without ever talking to Jared.
The conversation also covers a structural shift most retail investors never think about: Sarbanes-Oxley pushed the cost of going public so high that companies now stay private for years longer than they used to. The result is that individual investors increasingly only get access to companies like Uber, Snowflake, and SpaceX after institutional money has already captured the easy gains — access Jared argues used to belong to everyone.
The back half of the episode gets into the psychology of investing itself.
Jared cites a striking dataset from Finland, where mandatory military service means every man has an IQ test on file — and pairing that data against real brokerage account performance showed smarter investors meaningfully outperform, almost entirely because they're better at market timing, a finding that cuts directly against standard efficient-market thinking.
Jared also makes the case that "if you don't have something in your portfolio you hate, you're probably not diversified" — and closes on what might be the book's real thesis: that avoiding a 50% drawdown isn't really about the extra percentage points of return you give up to get there. It's about not spending years of your life anxious about money you can't do anything about.
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In this episode:
- What it was actually like running Lehman Brothers' ETF desk as the firm collapsed in 2008 — and why internal messaging didn't match what clients were saying
- Why Jared is glad Lehman wasn't bailed out, and how nearly everyone he worked with kept their jobs anyway when Barclays bought the broker-dealer for $2 billion
- How index funds grew from 2% to 56% of assets under management since 1997 — and why that concentration is the risk, not the protection
- The mechanics of the Awesome Portfolio: 20% each in stocks, bonds, cash, gold, and real estate, rebalanced once a year
- Why gold's zero correlation to stocks does more to cut volatility than most investors expect — and why 20% cash was the best-performing slice of the portfolio in the early 1980s
- How an independent linear-optimization study, done by an analyst with no connection to Jared, arrived at nearly the same allocation
- Why Sarbanes-Oxley pushed companies to stay private for years longer — and why that means retail investors now buy in on IPOs like Uber and Snowflake only after the easy money is gone
- A dataset from Finland's mandatory military service linking IQ scores to real brokerage account performance — and what it reveals about market timing
- Why Jared argues "if you don't have something in your portfolio you hate, you're not diversified"
- The real case for a lower-return strategy: avoiding years of psychological toll from a severe drawdown, and what that peace of mind is actually worth
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CONNECT WITH JARED DILLIAN:
🌐 Website: https://jareddillianmoney.com
📖 Book: The Awesome Portfolio - https://www.amazon.com/Awesome-Portfolio-Jared-Dillian/dp/1804094080