This is a Fire Drill

This note is called “This Is a Fire Drill” for a reason. Fire drills are not predictions of disaster; they are rehearsals. They reinforce procedure so that when stock market meltdowns inevitably return, we respond with discipline rather than emotion.

At some point, your portfolio will experience a larger-scale 15 – 25% pullback. When this happens, it will likely feel more unsettling than last April’s “Liberation Day” correction that we successfully navigated together. But temporary steep and sudden stock market declines are normal. Unprecedented global events, while emotionally and economically distinct, share a crucial commonality: every big stock market downturn is different but not different enough to permanently impair the superior long-term performance of global stocks OR your portfolio. This is merely an outcome of the unstoppable force of human progress, innovation, and scientific breakthroughs.

And this is critical: larger-scale stock market pullbacks are already built into your wealth plan.

Stock market corrections are already built into the rate of return assumptions we use in your wealth plan. These assumptions include recessions, bear markets, the Global Financial Crisis, COVID, and every other “once in a lifetime” event stock markets have endured. The average already accounts for the meltdowns.

I recently revisited Morgan Housel’s best seller, The Psychology of Money, (please let me know if you would like a free copy!) and several reminders are worth sharing:

• Financial success is not a hard science. It is a soft skill, where behavior matters more than intellect.
• Portfolio fluctuation is the price of admission for long-term compounding.
• The greatest risk is not a market decline, but investor behavior during one.
• Long-term results are driven more by discipline than by prediction.

Human nature struggles with uncertainty. During strong markets, we extrapolate recent returns. During unsettled markets, we feel an urge to act, often in ways that feel smart or prudent in the moment but prove costly over time.

Gold has recently re-entered headlines as a potential answer to U.S. currency weakness, geopolitical instability, or market risk. While gold can serve as a diversifier within a portfolio, it is not a substitute for productive assets. It does not generate earnings, dividends, or long-term compounding in the way businesses do. History reminds us that gold can test patience for extended periods, including a roughly 25-year stretch of flat performance leading up to 2008. Until recently, the price of gold had nearly a decade of limited advancement.

As we have consistently emphasized, we are goal-focused and plan-driven investors, not market-driven investors. Diversification remains our most reliable defense against inevitable economic and financial storms. No single asset is a silver bullet, and chasing perceived safety often undermines long-term outcomes.

At some point, and no one knows precisely when, markets will experience a significant decline. When they do, nothing about our philosophy changes.  We rebalance the portfolio, stay invested and for seasoned investors, we add new money to the portfolio during the storm. We continue to implement timeless, evidence-based principles: broad global stock diversification, exposure to reasonably priced “value” stocks and small/mid-sized stocks, and unwavering commitment to your long-term goals.

This is not a forecast. It is preparation.

Stop, Drop, and Stay the Course | Dimensional

If a significant drawdown would cause you to reconsider your stock exposure, that conversation is best had while markets are strong — not when headlines are loud and emotions elevated.

As always, our plan remains unchanged unless your goals change.

 

Sincerely,

Tim Pritchard FEA
Senior Wealth Advisor & Senior Portfolio Manager
Tel.: 416.969.3195
Tim.Pritchard@RichardsonWealth.com
Visit www.PritchardWealth.ca

 

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