Good morning, Pioneers!

Stock market investing is a core part of The Wealth Expedition.

In the journey I teach, investing plays two essential roles:

• Building long-term retirement wealth

• Creating an opportunity fund for early financial independence

That’s why I want to address a glaring reality in today’s markets: prices are extraordinarily high. I don’t say that often, but this is one of those moments worth paying attention to.

Today, I want to show you a smarter way to think about investing during late-stage bull markets like the one we’re in, and how to position your portfolio so you keep meaningful upside while also protecting yourself from the worst of potential downturns.

This isn’t about predicting a crash.

And it’s definitely not about timing the market. All-in, all-out timing strategies lose over the long run.

But this is about strategic positioning—a long-term approach supported by decades of research, with thoughtful, occasional adjustments to keep your risk aligned with reality.

In a moment, I’ll show you exactly how to do that.

If you haven’t yet joined the Founding Member Waitlist, I warmly invite you to do so. The soon-coming membership platform blends financial coaching, story-driven maps, and actionable strategies to help you build real financial freedom.

Enjoy the read!

Onward together,

Daniel

This content is for informational and educational purposes only and should not be considered individualized investment advice.

📽️ I’ve also covered this topic in a short YouTube video—check it out here.

FINANCIAL TOOL

Investing for a Recession: How to Build an All-Weather Portfolio That Can Handle Any Market

We’re three years into the current bull market, and prices are sky-high.

Stocks have been pricing in a very optimistic future: strong earnings, steady growth, and a soft landing that lasts indefinitely. Take a look at the Shiller Price-to-Earnings Ratio.

In terms of price compared with company earnings (adjusted for inflation), we are higher than we’ve ever been since 1998-1999.

When expectations are this euphoric, even a small negative surprise can send markets tumbling. A bigger disruption, or even the fear of one, could easily cause stocks to drop 20% or more.

Here’s the way I see it.

We can’t use the Shiller P/E ratio to time market downturns. But it does indicate that:

• Long-term average returns over the next ten years are likely to be below average.

• The bear market, when it comes, is likely to be a deep one.

Notice I said likely. Things could change. Things could be different. But with investing, we plan based on statistics.

We might go another year or two before hitting the bear, like we did in the late nineties. Or it might happen in the next six months.

The question becomes: is the potential upside worth the potential downside at this point?

We can’t predict the next bear market perfectly.

But we can prepare for it.

And one of the most effective ways to prepare is by designing a portfolio that’s intentionally built for multiple economic environments, not just the “good times.”

Recent research* from Eric Bouyé and Jérôme Teiletche of The World Bank highlights a powerful approach: instead of diversifying only by asset type, you diversify by regime type—the specific economic conditions the market moves through over time.

This “regime-based” approach can help investors better manage risk, hedge catastrophic drawdowns, and create an all-weather portfolio that’s built for both calm and storm.

*Bouyé, E., & Teiletche, J. (2025). Regime-Based Strategic Asset Allocation. Financial Analysts Journal, 81(4), 84–102. https://doi.org/10.1080/0015198X.2025.2558354

What Exactly Is a “Regime”?

The economy doesn’t live in one steady, average state. It cycles through very different “weather patterns,” each with its own character and implications for markets.

You can think of market cycles in terms of four main regimes that matter most:

1. Goldilocks (High Growth, Low Inflation)

• Economy is expanding

• Inflation is tame

• The stock market typically thrives

• Bonds do fine

• Most assets post positive returns

This is the regime we spend most of our time in: roughly 70–75% of the past 50 years.

2. Overheating (High Growth, High Inflation)

• Economy is still growing

• But inflation is rising fast

• Commodities and gold often outperform

• Traditional bonds can struggle

3. Stagflation (Low Growth, High Inflation)

• The worst mix for stock investors

• Rising inflation + slowing economy

• TIPS, gold, and certain commodities shine

• Equities and traditional fixed income often suffer

4. Downturn (Low Growth, Low Inflation)

• Recession or economic contraction

• Rates fall, growth slows

• Government bonds usually perform best

• Stocks tend to decline

Each of these regimes rewards different assets. That’s why a portfolio built for only one economic environment—typically Goldilocks—can struggle when the winds change.

Instead of trying to guess which regime is coming next, you can:

• Build an all-weather portfolio that blends what would be optimal in each environment.

• Spread risk across assets that account for these regimes.

• Reduce dependence on any single set of economic conditions.

• Goal: to improve long-term risk-adjusted returns.

Regime-based investing isn’t about market timing.

It’s about building a portfolio sturdy enough to weather anything.

What Are Regime-Based Portfolios?

In the study behind this article, researchers built four macro “regime portfolios”—each representing the optimal mix of assets within a specific environment. These regime portfolios looked very different:

• Downturn: Mostly government bonds

• Stagflation: TIPS + gold

• Overheating: Gold, commodities, REITs

• Goldilocks: A broader mix including stocks

These regime portfolios are intentionally different because the economic environments themselves are different. The magic happens when you combine them.

The researchers tested four approaches:

1. Probability-Weighted Average

Weights each regime portfolio according to how often the regime occurs long-term.

2. Equal Weight Across Regimes

Each regime gets the same capital weighting.

3. Equal Risk Contribution Across Regimes

Each regime contributes the same amount of total portfolio risk, not dollars.

4. Probability-Weighted Risk Contribution

Risk contributions match long-run regime probabilities.

Then they compared all four regime portfolios against traditional asset-based portfolios (60/40, risk parity, mean-variance optimization, etc.).

Which One Performed Best?

The results were fascinating.

In the full 50-year sample:

• Equal Risk Contribution Across Regimes showed the most consistent performance in downturns and stagflation, and had the lowest drawdowns.

In the out-of-sample, real-world test:

This is where things got surprising.

Traditional Mean-Variance Optimization—think of this as the widely accepted academically optimal portfolio—fell to last place by Sharpe ratio when tested out-of-sample.

But Equal Risk Contribution Across Regimes showed remarkable resilience:

• Lowest maximum drawdown

• Best Calmar ratio

• Strong Sharpe ratio

• Best performance in every crisis (1987, 1998, 2008, 2020)

In other words, the portfolio that didn’t try to guess which regime was coming next—but simply gave each regime an equal share of risk—proved the most durable when the world behaved unpredictably.

This reinforces an intuitive idea:

How to Apply This as an Everyday Investor

You don’t need a complex econometric model or institutional tools to apply regime-based principles in your own portfolio.

You just need to understand which assets perform well in different environments and blend them intentionally.

Here are four practical steps:

1. Own assets that win in different regimes

Each regime has its “champions”:

• Goldilocks: Stocks, REITs

• Downturn: Government bonds

• Stagflation: TIPS, gold

• Overheating: Commodities, gold, real assets

You don’t need perfect precision. Simply including these categories improves resilience.

2. Don’t let one regime dominate your risk

Applying the regime probabilities from the study:

• Goldilocks: 75.6%

• Overheating: 11.1%

• Downturn: 8.1%

• Stagflation: 5.1%

…we can build a conceptual, real-world version of this theoretical portfolio.

This is not a prescriptive model, but a way to visualize how the idea might translate into a practical investment mix.

A research-aligned PRC-style portfolio might look directionally like this:

• Equities (20–50%) – dominant Goldilocks exposure

• Treasuries (20–30%) – downturn hedging

• Corporate Bonds (10–20%) – income + Goldilocks credit spreads

• REITs (5–10%) – real estate exposure across Goldilocks & overheating

• TIPS (5–10%) – stagflation hedge

• Gold (7–12%) – stagflation + overheating hedge

• Broad commodities (5–10%) – overheating hedge

Because regimes differ dramatically, this diversified mix helps ensure your portfolio isn’t dependent on any single economic environment. It captures most of the upside in Goldilocks while adding meaningful protection in downturns and stagflation—the regimes where traditional portfolios tend to struggle most.

This isn’t a precise science, and it’s not a one-size-fits-all, but it is a helpful mental model for how this might be applied.

3. Use simple, low-cost ETF building blocks

You don’t need to overcomplicate this. Categories are the main thing:

• Broad equities

• U.S. Treasuries

• Investment-grade corporate bonds

• TIPS (Treasury Inflation-Protected Securities)

• Gold

• Broad commodities

• REITs (optional)

Even small allocations to inflation hedges can dramatically improve regime coverage.

4. Rebalance once a year

This is key.

Rebalancing ensures no single regime exposure grows too large and helps maintain a stable long-term risk structure.

You’re not predicting anything. Regular market timers almost always get burned in the long-run.

Rebalancing simply allows you to stay aligned with your strategy.

Final Thoughts: A Portfolio That Can Weather Anything

You can't predict when the next recession will hit, when inflation will surge, or when a geopolitical shock will rattle the markets. But you can build a portfolio that’s designed for all of these environments.

Regime-based investing offers a powerful insight:

By diversifying not just across assets, but across the risk of these four economic regimes, you strengthen your defenses, reduce catastrophic downside, and give yourself a steadier, more resilient path to long-term wealth.

That’s the essence of an all-weather portfolio. And it’s a smarter way to invest for whatever comes next.

Join the Expedition

If this perspective resonated with you, I’d like to invite you to join the Founding Member Waitlist for The Wealth Expedition—my soon-coming membership platform built to help everyday wealth-builders grow with clarity, confidence, and purpose.

Inside, you’ll find:

• Community — a group of people pursuing financial freedom together

• Accountability — gentle structure to help you make real progress

• Guidance from a CFA Charterholder with 13+ years of experience

• Story-driven maps that lead you from zero to financial abundance

• Self-paced lessons and actionable tasks to build momentum

• Weekly insights, challenges, and tools to help you apply what you learn

Only the first 100 people will receive Founding Member status. We’re going live very soon. I'm just polishing the final details at this point.

I’d love to have you on the journey.

Welcome aboard—and I hope to see you inside!

Daniel Lancaster, CFA

Forwarded this email? Subscribe here.

I’d love to hear from you. Let me know what you’d like to see in upcoming newsletters, articles, or a digital course at Contact Us - The Wealth Expedition.

Follow me on X, Facebook, LinkedIn, or YouTube