Concerns that a trade war could lead to a recession have rippled across global markets. Investors have been watching closely as China responded to recent U.S. trade actions with retaliatory tariffs, increasing the perceived risk of a full-scale economic standoff. As a result, markets in Asia and Europe declined alongside U.S. equities, and we’ve seen a familiar “flight to safety,” with bond prices rising and yields falling.

However, on April 9th, 2025, the landscape shifted dramatically. In a surprise move, President Trump announced a pause on all tariffs except those targeting China—a decision that immediately changed the tone of the markets. I was on the phone with a client at that very moment, reassuring her that, in my view, an inflection point could come at any time, and when it did, we could see a sharp, unexpected rally. As our call wrapped up, I paused and said, “Something just happened—and it’s big.” The market had erupted into a massive rally right around 1 p.m., validating the very scenario we had just discussed.

This moment serves as a powerful reminder: markets don’t wait for clarity—they respond to it in real time. Investors who remain disciplined and long-term focused are often the ones best positioned to benefit when sentiment and policy shift unexpectedly.

Despite the rally, we don't know what tomorrow holds. My favorite verse I quote is from Ecclesiastes 11:2 - "Divide your portion to seven, yes even to eight, for you do not know what calamity may come upon the earth."

So in light of the NCAA tournament that saw UCONN win a national championship on the women's side and Florida take home the prize on the men's side - let's talk about why your portfolio, much like these two impressive basketball teams, needs to be excellent in both it's offense and it's defense.

Portfolio balance and financial planning are even more important today

In sports, as well as investing, a winning strategy requires a combination of both offense and defense. Defense involves maintaining a portfolio that can withstand different phases of the market cycle. Stock market uncertainty and unexpected life events are inevitable, so always being ready to play defense is important. Going back to Feb 19th, while the stock market cratered, the bond market's return (using the Vanguard Total Bond Fund ETF "BND" ) was +0.83%. Comparatively, the S&P 500 returned -18.76%, the Nasdaq Composite Returned -23.77%, and the Russell 2000 returned -22.62% over that same period. That is the definition of lockdown defense.

Offense, on the other hand, involves taking advantage of market opportunities that emerge from changing conditions. The irony is that while periods of market uncertainty may be unpleasant, they also represent times when asset prices and valuations are the most attractive. Ultimately, portfolios that are tailored toward financial goals need both offense and defense. How can investors position in today’s market environment to both protect from risk and take advantage of opportunities?

Two of the key principles of long-term investing are diversification and maintaining a long time horizon. This is showcased in the accompanying chart which depicts the range of historical outcomes across stocks, bonds, and diversified portfolios. It also shows how these ranges change when time horizons are increased. For instance, it’s easy to see that over just one-year periods, the stock market can vary significantly, from gaining 60% in 1983 when the market recovered from stagflation fears, to -41% during the global financial crisis.

Moving beyond just one-year periods and a stock-only portfolio underscores why these are powerful ways to think about investing and financial planning. Diversifying might reduce the maximum returns an investor can experience, but it also reduces risk. This is evident in the balanced portfolio consisting of 60% stocks and 40% bonds. So far this year, the S&P 500 is 13% lower, but a 60/40 mix of these indices has declined only 4.6%.

After all, the goal is not simply to grow a portfolio at the fastest but most volatile rate, but to have the highest possible probability of achieving your financial goals. A diversified portfolio historically has a much narrower range of outcomes, allowing investors to better plan toward their goals.

Similarly, extending your time horizon by even a few years can have a significant impact on the range of outcomes. History shows that, since World War II, there has not been a 20-year period in which any of these assets and portfolios have experienced annual declines, on average. The same is true over 10-year periods for many diversified asset allocations. While this is only illustrative and is no guarantee of future performance, it clearly shows the importance of thinking long-term.

Volatility can create opportunities

What about market opportunities? The accompanying chart shows that the VIX index, often known as the stock market’s “fear gauge,” can spike on a periodic basis. These peaks correspond to sharp drops in the market, such as in 2008 or 2020. These are times when markets are the most nervous and, in many cases, investors feel as if the situation will never stabilize.

This chart, which is similar to a chart I showed on my recent YouTube Video, also shows the returns of the S&P 500 over the next year. As we discussed above, there is never any certainty about returns over any single year for the stock market. However, it’s clear that the greatest market opportunities often emerge when investors are the most worried. This is the heart of the famous Warren Buffett quote to “be fearful when others are greedy, and greedy when others are fearful.”

This is especially true when markets face liquidity concerns rather than solvency issues. Liquidity problems arise when market downturns force leveraged investors—those using borrowed money—to sell off assets to cover their positions. This often leads to price declines even when the fundamentals of the asset remain solid. It’s a prime example of how short-term market moves can become disconnected from long-term realities, creating unique opportunities for patient, disciplined investors. As Dave Ramsey teaches, we should stay far away from debt—both personal debt and margin debt—because borrowing to invest adds unnecessary risk and can force investors into painful decisions during volatile markets.

It's important to note that this is not an argument for market timing. Even when the VIX is high, there is no guarantee that markets will rebound quickly. Instead, investors should view this as additional support for taking a portfolio perspective. Market downturns often occur when valuations are the most attractive, and thus, it can make sense to shift toward – not away – from these assets. Of course, what makes sense for a given portfolio depends on the specific circumstances. Really, the most prudent scenario may be - just build a plan (baby step 4) and execute it. You'll probably execute it in good times and bad times, and that'll lead to some excellent entry points in your investment portfolio.

Valuations are more attractive today

So, which assets have helped this year, and which are more attractive today? Bonds have played an important role this year as interest rates have fallen, helping to balance portfolios and partially offset declines in other asset classes. Bonds are able to do this because they typically exhibit lower volatility than stocks and often move in the opposite direction. For this reason, investors often say that “bonds zig when stocks zag.” Holding the right balance of “uncorrelated” assets helps investors prepare for challenging times.

Valuations, while potentially stretched for the S&P 500 (nearly 20X), which is why we recommend a more balanced and valuation-focused approach to your S&P 500 exposure, or growth and growth & income in Dave Ramsey's Vernacular, the valuations of the Russell 2000 (Aggressive Growth) are around 14X earnings, and the valuations of the MSCI EAFE (International) are around 14X, providing historically good ten-year forward-looking returns when you buy stocks at those (Russell & MSCI EAFE) valuation points. Indeed, they are more attractive today after this recent drawdown. While it is still unclear where earnings will settle after accounting for tariffs, we should get insight very soon as earnings season kicked off with Delta Airlines today, and Friday will include the big banks (JP Morgan, Citi, Wells Fargo). Some sectors, such as Information Technology, Communication Services, and Consumer Discretionary, have seen multiples decline more amid the broader pullback.

Interestingly, assets such as gold, which often serve as safe havens, have struggled more recently. Gold prices rose to new all-time highs earlier this year, resulting in double-digit returns over the past year. Investors are typically drawn to this asset class for many of the same reasons they are interested in bonds – it can serve as a store of value in times of uncertainty. However, gold prices have also retreated as economic fears have weighed on all commodities. This highlights the importance of not focusing only on a single asset class, but viewing it from a holistic portfolio perspective.

The bottom line? Offense and defense are both important in times of market uncertainty. They help investors manage risk and take advantage of attractive opportunities that may emerge