Let’s talk about something no one likes to think about: market crashes. They happen. Maybe one will happen in 2025, or maybe it’ll be 2030, but history tells us that market downturns come around every few years. We don’t know when, by how much or for how long — but they’re inevitable. So, what do we do about it?
That’s where the “lifeboat drill” comes in — a simple yet powerful exercise to help you prepare for the ups and downs of investing.
Imagine you’re setting off on a cruise. You’re excited — bags are packed, cocktails are calling, and the open sea awaits. But before the fun begins, the captain gets on the loudspeaker to deliver a safety briefing. You learn where the lifeboats are, how to find your flotation device and what to do in case of an emergency. It’s all about being prepared, even though no one who boards a cruise is expecting a disaster.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The same logic applies to your finances.
Markets have been kind lately, delivering strong returns that make us feel good about our portfolios. But that’s no reason to ignore the inevitably rocky waters. Have you thought about how your investments — and your emotions — will hold up during a market downturn?
What if?
Here’s the scenario: Imagine the markets drop 25% next year. If you have $1 million invested, that’s a loss of $250,000 on paper. How does that feel?
Of course, it doesn’t feel great. But the real question is: What will you do about it?
- Will you sell everything and go to cash?
- Will you panic during your next portfolio review?
- Will you see it as a buying opportunity?
- Will you stay the course, knowing markets tend to recover over time?
Your response to this exercise is critical because it helps you plan ahead. When markets drop, emotions run high. Decisions made in the heat of the moment can often lead to regret. That’s why it’s so important to have a strategy in place before the storm hits.
When the market takes a dive, my plan is simple: stick to the course. I’ll keep investing on my regular schedule, and if I have extra cash, I might even invest more. What I won’t do is check my portfolio obsessively — it’s too tempting to make knee-jerk decisions.
This approach works because my portfolio is already structured to reflect my long-term goals and risk tolerance. It’s built to weather downturns so there’s no need to change course when things get rough.
Your lifeboat drill
Since we’ve just closed out another strong year in the markets, now is the perfect time to reflect. Take a hard look at your portfolio. Are your investments aligned with your goals and your ability to handle market swings? If not, now’s the time to make adjustments.
Running this lifeboat drill is one of the smartest things you can do to prepare for the inevitable ups and downs. It’s not about predicting the future — it’s about being ready for it.
If you’re unsure where to start, reach out to a financial adviser who can help you develop a plan that makes sense for your unique situation.
Here’s to staying wealthy, healthy and happy — no matter what the markets bring!
Diversified is a registered investment adviser, and the registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. A copy of Diversified’s current written disclosure brochure which discusses, among other things, the firm’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.
Diversified, LLC does not provide tax advice and should not be relied upon for purposes of filing taxes, estimating tax liabilities or avoiding any tax or penalty imposed by law. The information provided by Diversified, LLC should not be a substitute for consulting a qualified tax advisor, accountant, or other professional concerning the application of tax law or an individual tax situation.
Nothing provided in this article constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
Related Content
-
U.S. Treasury to Eliminate Paper Checks: What It Means for Tax Refunds, Social SecurityTreasury President Trump signed an executive order forcing the federal government to phase out paper check disbursements by the fall.
-
Bigger Social Security Checks Are Arriving in AprilPayments to eligible retired public sector employees will increase starting in April due to the Social Security Fairness Act (SSFA)..
-
Bigger Social Security Checks Are Arriving in AprilPayments to eligible retired public sector employees will increase starting in April due to the Social Security Fairness Act (SSFA)..
-
Seven Questions to Ask When Evaluating Personal Loan OptionsTaking out a personal loan too hastily could lock you into unfavorable terms with an untrustworthy lender. Ask these questions before signing anything.
-
Return to Your Home Country to Retire: Repatriation RetirementThey came to the U.S. to live and work, but they want to retire in the old country. Here's how to juggle the move back home.
-
How Much Does Being Rich Matter in Retirement?After a certain point, having more money in retirement won't make you any happier, new research shows. Instead, physical health, a sense of purpose, and a minimal amount of non-mortgage debt are more relevant.
-
The Three Biggest Fears Keeping Retirees Up at NightHere are the steps you can take to put those fears to rest and retire with confidence so you can relax and enjoy the life you've planned.
-
What Can a Donor-Advised Fund Do for You? (A Lot)DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
-
Estate Planning When You Have International AssetsEstate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
-
Microsoft Stock: Innovation Spurs Its 100,000% ReturnMicrosoft's ability to recognize the "next big thing" has allowed sales – and its share price – to grow exponentially over the years.
