As we head into fall, we take the opportunity to run a financial "fire drill"—not because we expect a crisis, but because we know volatility is inevitable. This episode is all about preparation: emotionally and strategically. Ed Lambert, Alex Cabot, and Jag kick things off with some seasonal banter, but quickly dive into why fall is a natural time to reassess our portfolios and our mindset around investing.
Ed begins by reminding us that even in strong years, the market doesn’t move in a straight line. The S&P 500 typically sees multiple 5% dips annually and about a 10% correction every year or two. But those drops aren’t signs of failure—they’re part of the process. He walks us through some of the scariest moments of the last 15 years—like the 2011 debt ceiling crisis, the COVID crash of 2020, and the recent sharp drop in April 2025—highlighting how each time, the market rebounded. The key, he says, is staying the course and not reacting emotionally. Emotional decisions—especially ones made in fear—almost always lead to poor outcomes.
We focus heavily on the idea that emotional preparation is just as important as strategic allocation. Ed makes the point that volatility is the price of admission for long-term growth. He urges listeners to “zoom out” and look at the long-term trajectory of the market, where short-term declines barely register. Since 1980, despite multiple downturns, the market has averaged nearly 10% returns annually.
Alex then picks up the second half of the fire drill analogy—portfolio preparation. He compares asset allocation to a smoke detector: you want it functioning before there's smoke. He explains that the right asset mix comes from evaluating three factors—your goals, your timeframe, and your risk tolerance. Importantly, risk tolerance has both a financial and emotional component, and the two don’t always align. He gives practical examples for how these factors influence portfolio design—contrasting a 25-year-old saving for retirement with someone needing cash in six months for a car purchase.
He also stresses the need to regularly rebalance portfolios. Just like a smoke detector can get out of sync, so can an asset allocation if left unattended. Ignoring this can lead to a portfolio that doesn't reflect your needs or goals. Whether it’s a 5% dip or a 25% drawdown, a well-built and actively managed allocation keeps investors steady. Alex closes with an important reminder: every downturn in history has ended in recovery. The question isn’t if volatility will come, but when—and how prepared we’ll be.
Have you ever had a smoke detector battery die in the middle of the night? We swap stories about that to cement our analogy.