By: Reed Fraasa, CFP®. RLP®, AIF®
Why a well-built portfolio is the only honest answer to the question everyone is asking right now.
I have been getting some version of the same question from clients for the past several weeks. It sounds something like this: “Reed, with everything going on — the war with Iran, oil prices spiking, inflation creeping back, AI wiping out jobs — how far is the stock market going to drop? Should I be doing something?”
I appreciate the question. It tells me you are paying attention. But I want to be honest with you, because that is the only way I know how to do this work: nobody — not me, not the strategists on CNBC, not the economists with the Nobel prizes — can tell you how far the market is going to drop or when it will bottom. Anyone who says otherwise is selling something.
What I can tell you is this: we have been here before, many times. And the framework we built for our clients’ portfolios was designed precisely for moments like this one.
History Does Not Repeat, But It Rhymes
Let’s take a quick look backward, because history has a way of providing perspective that the news cycle never will.
During the Korean War (1950–1953), the Dow Jones dropped sharply at the outbreak but recovered within months and finished the period significantly higher. During the Cuban Missile Crisis in October 1962 — arguably the most terrifying two weeks in American history, when nuclear war felt like a coin flip — the S&P 500 fell about 7% over a few weeks and fully recovered within three months. During the first Gulf War in 1990 and 1991, markets dropped roughly 20% in anticipation of the conflict, then rallied sharply the day the air campaign began. The 9/11 attacks closed the U.S. markets for four days. When they reopened, the S&P 500 fell almost 12% in a week — and recovered within two months.
More recently, from February to March 2020, the COVID pandemic caused the S&P 500 to lose over 33% in just five weeks. It recovered in full by August, five months later. Russia’s invasion of Ukraine in early 2022 added fuel to a hyperinflation cycle that pushed the stock market down nearly 25% and the bond market down over 13% simultaneously. Both recovered. Both always have.
In fact, in every single one of the fifty years from 1973 to 2023, the stock market experienced a drawdown at some point during the calendar year. Yet the vast majority of those years ended in positive returns. Crisis is not an aberration in investing. Crisis is investing. The question is not whether you will face uncertainty. The question is whether your portfolio was built to withstand it.
Why This Time Feels Different (And Why It Always Does)
The current environment has a particular combination of variables that makes it feel uniquely menacing. A direct military conflict with Iran and the corresponding disruption to oil markets. Inflation that refuses to cooperate fully. An unemployment picture complicated by an AI-driven displacement of entire job categories that has no modern precedent. Tariff pressures are rippling through global supply chains. It is a lot.
And yet — the Dot Com bubble burst, then 9/11 happened, then Enron collapsed, then the Supreme Court decided a presidential election, all within a two-and-a-half-year window. The Great Recession of 2007 to 2009 brought the financial system to the brink of collapse. In 2020, we shut down the global economy by government decree. The common denominator in every one of those periods was that the situation felt unprecedented, unnavigable, and irreversible. And in every case, the market recovered.
The reason the stock market has always recovered is not wishful thinking. It is structural. Checks and balances, regulatory oversight, accounting standards, consumer protections, and the freedom of information support the capital market system. It is not perfect. But it is resilient. As long as companies continue to produce goods and services, earn profits, and employ people, the market’s long-term direction is upward. That is the bet we are making when we invest, and history has never given us a reason to stop believing in it.
You Wouldn’t Eat the Ingredients Separately
Here is the part where I want to talk about how we build portfolios, because I think it gets to the heart of why you should not panic right now.
Building a portfolio is a lot like baking a cake. You start with a set of ingredients — flour, eggs, butter, sugar, baking powder, and a pinch of salt. Each one of those ingredients, taken alone, is either unpleasant or inedible. You would not sit down to eat a bowl of raw flour. A spoonful of baking powder would be genuinely awful. Even sugar in the quantities required would make you sick if you consumed it straight. But, combined in the right proportions and with the right process, those same ingredients become something entirely different. Something that works.
A well-diversified portfolio works the same way. U.S. large-cap equities. Emerging Markets stocks. Small-cap value. Private Markets. Investment-grade bonds. Short-duration fixed income. Some of those asset classes will lose money in any given year. Some will look embarrassingly boring while others are soaring. The international allocation may lag for years while domestic stocks run. The bond component will feel frustrating during an inflationary period. The small exposure to commodities or real assets might seem like noise most of the time — until the kind of oil shock we are seeing today makes it look like a stroke of genius.
The point is this: no single ingredient should dominate the recipe, and no single ingredient should be removed just because it tastes bitter on its own in the moment. The magic is in the combination, the proportions, and the discipline to leave the recipe alone when your instincts are screaming at you to start substituting ingredients based on what the news told you this morning.
The research behind modern portfolio construction consistently shows that it is the asset allocation decision — the mix of ingredients — that drives the overwhelming majority of your long-term results, not the selection of individual securities, and certainly not the timing of your entry and exit from the market. The investors who tried to flee to cash in October 2018, March 2020, or the fall of 2022 did not avoid the pain of the drawdown. They just missed the recovery.
The Framework Is the Answer
When you ask me how far the market is going to drop because of the war, the oil price, or AI disruption, what you are really asking is whether your plan still holds. And that is exactly the right question.
Your portfolio should not be built for a world where nothing goes wrong. It is built for the world we actually live in, where something is always going wrong. Your time horizon, income needs, risk tolerance, and spending goals — those are the ingredients you weigh carefully when building your allocation. The goal is never to build a portfolio that avoids all volatility. That portfolio does not exist. The goal is to build a portfolio you can stay in through all of the volatility, so that you are still invested when the recovery comes — as it always has.
If your circumstances have changed — if you need more liquidity in the near term, or your income needs have shifted, or your time horizon looks different than it did — then we should talk about that. Those are the right reasons to revisit your allocation. The headlines are not.
The war will end, or it will shift and evolve. Oil prices will spike and then moderate, as they always have. Inflation will work its way through the system. AI will displace some jobs and create others, as every prior wave of technological disruption has done, from the railroad to the internet. The market will digest it all. It will be uncomfortable in the short run. The cake will look like a mess before it goes in the oven.
Trust the recipe.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
The above article was written with the assistance of artificial intelligence (AI).