Sutton Capital: THE INVESTOR with Joel Palathinkal Sep 19, 2026 22m 10m saved
With Jared Dillian, founder of Armington Capital and editor of the Daily Dirtnap, who traded index arbitrage and exchange-traded funds at Lehman Brothers until the 2008 bankruptcy
Jared Dillian holds 20% each in stocks, bonds, gold, cash and real estate, and says that mix fell 9% in 2008 while the S&P 500 fell 36.5%.
The standard retirement package is an index fund plus a bond fund, sold as diversification. Dillian said stocks and bonds are both financial assets that respond to the same factors, so a rise in interest rates takes both of them down together.
"If you're very wealthy your goal is to preserve that wealth and not screw it up. The last thing you want to do is take 300 million and turn it into 150."
Dillian, founder of Armington Capital, on Sutton Capital's THE INVESTOR with Joel Palathinkal, spent seven years trading index arbitrage and ETFs at Lehman Brothers, left at the bankruptcy, and has published the Daily Dirtnap newsletter for 18 years since. His seventh book, The Awesome Portfolio, had been on sale for eight days when this interview was recorded.
The full interview is covered here so you can skip it. 22 minutes of audio, 13 minutes of reading.
Here are the 10 principles that matter.
Key Takeaways
Stocks and bonds are both financial assets and fall together when interest rates rise, so an index fund plus a bond fund is not diversification
The whole portfolio is 20% each in stocks, bonds, gold, cash and real estate, rebalanced once a year
Five exchange-traded funds, three of which he names: VTI, BND and IAU
Give up 1–2% of return to halve volatility and nearly remove drawdowns, which is what multistrategy hedge funds are paid to do
People with $200,000 to $600,000 take more risk than people with $300 million, and he says that is backwards
A $400,000 retirement account deserves the same caution as $300 million, because it is the whole of one household's savings
The awesome portfolio lost 9% in 2008 against the S&P 500's 36.5%, and that is where he says the outperformance comes from
Expect stretches of 6–8% a year while the S&P 500 does 18–20% and everyone around you is bragging
AI can tell you the consensus, not a trade — he cites Ken Griffin saying it is not yet good enough to make trading decisions
Thematic ETFs are not worth owning: issuers launch hundreds a year and, in his words, most of it is crap
Commodities are now buyable in an ETF wrapper rather than through a futures account or a managed-futures fund
1. Coast Guard to Lehman
The host opened on schooling and career. Dillian went to the Coast Guard Academy for his undergraduate degree, majored in math, and served five years in the Coast Guard. He took an MBA at the University of San Francisco while still serving, spent a couple of years on the floor of the Pacific Options Exchange, and then joined Lehman Brothers, where he worked for seven years doing index arbitrage and ETF trading.
The firm went under in 2008, and the newsletter he still writes started that week.
The newsletter is 18 years old and dates from the week Lehman failed
I left at the bankruptcy, started my newsletter, which is Daily Dirtnap. I've been doing that for 18 years.
Jared Dillian
He has published seven books, with an eighth due next year. The first was Street Freak, a memoir of working at Lehman Brothers; the most recent is The Awesome Portfolio, which he held up on camera and said had been out for eight days. He finished the education section by noting a master of fine arts in creative writing from the Savannah College of Art and Design.
2. Don't Own Your Employer
Asked what trading taught him, Dillian went to Lehman's employee stock purchase plan. Staff could buy the firm's own shares at a 10% discount, $63 for a $70 stock, and many of them did, on top of the stock they were already paid in.
A 10% discount on your employer's stock is the best deal in the world and the worst position
So basically you're selling a dollar for 90 cents, the best deal in the world.
Jared Dillian
The problem was concentration. Employees held large exposure to the company paying their salary, and when it failed they lost both at once.
But the problem is obviously that a lot of people loaded up on Lehman stock and they were getting Lehman stock for compensation and they had a lot of risk exposure to the place that they worked, and then when it went out of business, they were totally stuck.
Jared Dillian
Dillian bought none of it himself. He was still paid a good deal of stock, sold what he could, since some of it was restricted, and took a heavy financial hit anyway, with the rest of what he owned falling at the same time. That year set his approach: volatility is the enemy and drawdowns are the enemy. Beating the market, he said, is not practical much of the time. Accepting slightly less is.
The trade is 1–2% of annual return for half the volatility
You can return one or 2% less and cut your volatility in half and almost get rid of your drawdowns.
Jared Dillian
He said this is not an original idea, and pointed at the institutions that charge for it. The largest multistrategy hedge funds run to the same standard, and he said that is why they have $100 billion in assets.
The big multistrategy hedge funds like Millennium or Balyasny or Exodus Point, if they have a 2% drawdown in a month, it's catastrophic.
Jared Dillian
Their aim, he said, is 12, 13 or 15% a year with nothing in the way of drawdowns and straight-line growth.
3. Bonds Don't Diversify
The host asked how different investors should build a portfolio. Dillian started with his own first purchase, an index fund in 1997, when index funds were about 2% of assets under management and were sold on the promise of instant diversification: one fund, 500 stocks; one bond fund, 3,000 bonds.
Two asset classes that answer to the same variable are one asset class
If you only have stocks and bonds, you're not really diversified because these are both financial assets, right? They respond to the same factors.
Jared Dillian
His fix is real assets: real estate of every kind, land, and commodities including gold, plus cash, which he said smooths volatility and has its own good periods, the late 1970s among them.
Five sleeves, equally weighted, and that is the entire construction
So, stocks, bonds, gold, cash, and real estate is the awesome portfolio. You have a 20% allocation to each, and that's the secret sauce.
Jared Dillian
4. $300M vs a $400K Egg
The host pushed on whether the weights should change with the size of the pool — a pension fund against a retail investor. Dillian said the book is written for retail investors and that an endowment or a pension fund has completely different objectives; the portfolio would still work, or something like it, but a household is not a pension fund.
He then made the argument from the opposite end, with a lottery win. If you took $300 million from the Mega Millions, he said, you would not put it in the S&P 500 chasing $5 billion in twenty years. You would buy Treasury bills or money market funds, make 4% a year, or $12 million, and live on it.
Wealth makes people cautious and the middle class does the opposite
So what I found is that middle class people or upper middle class people who have 200,000, 300,000, 600,000 to invest are more risk seeking than very wealthy people.
Jared Dillian
His point was the asymmetry between those two positions. Nobody with $300 million wants to risk having $150 million.
Somebody who's middle class is more than willing to take 400,000 and turn it into 200,000.
Jared Dillian
A retirement account is a life savings, whatever the number on it
if you have saved for 20 years and you have this retirement nest egg that's $400,000, you should treat it as if it's $300 million. This is your life savings and you don't want to gamble or take huge risks with your life savings.
Jared Dillian
5. Rich, Happy, Or Both
Asked to describe a high-risk, a medium and a conservative portfolio, Dillian said the question has mostly been settled by behavior: the majority of investors already hold high-risk portfolios. He counts the S&P 500 itself as high risk, and said most people have gone well past it into leveraged ETFs, semiconductor stocks and quantum computing stocks. The average investor at this point in history, he said, is taking an enormous amount of risk.
His portfolio sits in the middle. He then read off a pair of charts from the book that set wealth against comfort, using a bank account paying 8%, a rate he noted does not exist, as the comparison.
Zero volatility over 40 years makes a saver happy but not rich
If you have money in the bank earning 8% a year and that compounds over 40 years, you're pretty happy because your volatility is zero.
Jared Dillian
The S&P 500 pays more and costs the investor sleep
If you have your money in the S&P 500 and you're taking 20% drawdowns, 30% drawdowns, 50% drawdowns, but it returns 12% a year, then you're rich, but you're not very happy.
Jared Dillian
The book, he said, is the middle ground between the two, where an investor is rich and happy at the same time.
6. The Five Funds
The host asked which passive funds he recommends for someone dollar-cost averaging every month, and mentioned QQQ. Dillian named three of the five by ticker.
VTI, BND and IAU are the stock, bond and gold sleeves
The ones I recommend in the book are VTI for stocks, okay, which is the Vanguard total stock market index, which gives you some small cap exposure, which I think is important.
Jared Dillian
BND is the Vanguard Total Bond Market Index and IAU is the gold holding. Asked how a large-cap S&P 500 fund compares with VTI, he said the S&P version is a mega-cap large-cap index that leaves out small companies. Twenty to twenty-five years ago, he said, large caps returned about 9% a year and small caps about 12%, until that gap disappeared after about 2003.
He keeps small-cap exposure for a regime that has not arrived yet
But it might come back — like we might have another regime where small cap does better. So you do want exposure to it.
Jared Dillian
7. Down 9%, S&P Down 36.5%
On how a beginner starts, Dillian said implementation is the easy part: five ETFs, rebalanced once a year, and read the book. The hard part is sitting through the stretches when the portfolio lags.
The cost of the strategy is years of watching other people do better
So, there's going to be periods of time when you're making six, seven, eight% a year and the S&P is doing 18 or 20 and everybody around you is going to be bragging about how much money you're making and you're going to feel like an idiot.
Jared Dillian
The payment for that, he said, comes in the bad years. He named 1973, 2000, 2001 and 2008, and gave one set of numbers for it.
The 2008 gap is where he says the outperformance is earned
So, for example, in the financial crisis in 2008, the S&P was down 36.5%. The awesome portfolio was down 9%.
Jared Dillian
8. AI Gives You Consensus
The host asked whether AI-built trading strategies would beat plain ETFs. Dillian said the question was above his pay grade and reached for someone else's answer.
He quoted Ken Griffin rather than give his own verdict
That's kind of above my pay grade. It's funny — Ken Griffin at Citadel was recently asked about that and he said that AI is not yet sophisticated enough to be making trading decisions.
Jared Dillian
What it does well, he said, is repeat what everyone already believes.
What AI can tell you is it can scrape the internet and it can tell you what the conventional wisdom is.
Jared Dillian
Ask it for a portfolio, he said, and it returns 60/40, some growth and some value, some international, some Treasuries, corporates and mortgages.
9. Commodities In A Wrapper
Asked for more tickers, Dillian said that as a former ETF trader he could list 3,000 of them and doubted the host wanted that. Pressed for three or four, he gave two, both in commodities, and explained why the category used to be closed to individuals: you needed a futures account, your own index and a monthly roll, which is expensive and a nuisance, or a managed-futures fund, which is also expensive.
Two commodity-index funds do the futures roll for you
So, DJP is good. BCD is another one. DJP is, I think, the Dow Jones commodity index, and BCD is the Bloomberg commodity index.
Jared Dillian
The funds hold commodity futures and roll them, he said, sometimes in contango and sometimes in backwardation, so there is a small cost of carry. He called it the best way to invest in commodities.
10. Against Theme ETFs
The host raised thematic funds — the ETFs that carried SpaceX exposure around its listing, and a robo-taxi fund he expects someone to launch off Elon Musk's program. Dillian, who came out of the ETF industry, said he recommends against the whole category.
The good ideas in ETFs are already taken and the rest is launch volume
I think all the really good real estate has been taken in the ETF world, and you have some issuers that are just launching hundreds of ETFs a year — they're just throwing spaghetti against the wall and most of it is crap.
Jared Dillian
One occasionally takes off, he said, but it is very rare. What he sticks with is the list of large asset classes: stocks, bonds, gold, cash, real estate, growth and value, small cap and large cap, mortgages, corporates and Treasuries.
Bonus Insights
He writes, trades, teaches and DJs, and his one piece of advice is about hours
And there's 24 hours in the day. And I think for a lot of people, the day ends at 4:00 and they have dinner and sit on the couch and watch TV.
Jared Dillian
Asked at the close for a single piece of advice from a mentor or a colleague, he listed what he does: seven books, DJ sets around the country, the newsletter, trading and teaching. With an evening free, and allowing for anyone whose time is taken by children, he said there is a lot a person can do and still sleep enough.
So, I guess just work harder.
Jared Dillian
The host framed the whole conversation at the top as an asset-management problem: part of what drives alpha, he said, is news and investment research, and relying on people who are thought leaders in the space.
Dillian's bottom line is that a household should buy the thing a large multistrategy fund is paid to deliver, a return a point or two below the market with the drawdowns taken out, and that the way to get it is five funds, equal weights and one rebalance a year.
Products, Companies & Tools Mentioned
Armington Capital (Dillian's firm; he trades as well as writing and teaching)
The Daily Dirtnap (The newsletter he started at Lehman's bankruptcy and has published for 18 years)
Lehman Brothers (Seven years of index arbitrage and ETF trading, an employee stock purchase plan at a 10% discount, and the drawdown that set his investing philosophy)
Vanguard Total Stock Market ETF (VTI) and Vanguard Total Bond Market ETF (BND) (The stock and bond sleeves of the portfolio; he picks VTI over an S&P 500 fund for the small-cap exposure)
iShares Gold Trust (IAU) (The gold sleeve, one fifth of the portfolio)
Vanguard S&P 500 ETF (VOO) (Raised as the alternative to VTI; he called the S&P version a mega-cap index that misses small caps)
Invesco QQQ (Named by the host as a fund retail investors already know; Dillian did not recommend it)
iPath Bloomberg Commodity Index Total Return ETN (DJP) and abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD) (The two commodity funds he names; he said he thinks DJP tracks the Dow Jones commodity index and BCD the Bloomberg commodity index)
Millennium, Balyasny and Exodus Point (The multistrategy funds he uses as the benchmark: a 2% monthly drawdown is catastrophic, and he says that discipline is why they hold $100 billion)
Citadel (Ken Griffin's comment that AI is not yet sophisticated enough to make trading decisions was Dillian's answer on AI)
SpaceX (The host's example of a theme investors chased through ETFs with indirect exposure)
Mega Millions (The $300 million thought experiment behind his claim that wealth makes investors cautious)
United States Coast Guard Academy, University of San Francisco and Savannah College of Art and Design (Math degree, MBA taken while serving, and a master of fine arts in creative writing)
Books & Resources Mentioned
The Awesome Portfolio – Jared Dillian (The book this interview is about: five asset classes at 20% each, rebalanced annually, with the historical returns behind it)
Street Freak – Jared Dillian (His first book, a memoir of working at Lehman Brothers)
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