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
-
Can the 'Guardrails Approach' Protect Your Retirement Investments?This investing method helps retirees avoid running out of money, even in a highly volatile market.
-
Social Security Is Taxable, But There Are WorkaroundsIf you're strategic about your retirement account withdrawals, you can potentially minimize the taxes you'll pay on your Social Security benefits.
-
Social Security Is Taxable, But There Are Workarounds
If you're strategic about your retirement account withdrawals, you can potentially minimize the taxes you'll pay on your Social Security benefits.
-
Serious Medical Diagnosis? Four Financial Steps to TakeA serious medical diagnosis calls for updates of your financial, health care and estate plans as well as open conversations with those who'll fulfill your wishes.
-
What Wall Street's CEOs Are Saying About Trump's TariffsWe're in the thick of earnings season and corporate America has plenty to say about the Trump administration's trade policy.
-
The Role of the Dollar in Retirement: Is It Secure?Protect your retirement from de-dollarization, because “capital always goes where it is treated best."
-
Retire in France for Beauty and CultureFrance offers a great history and a slower pace of life for retirees. At times, it can feel like stepping into a postcard.
-
To Stay on Track for Retirement, Consider Doing ThisWriting down your retirement and income plan in an investment policy statement can help you resist letting a bear market upend your retirement.
-
How to Make Changing Interest Rates Work for Your RetirementHigher (or lower) rates can be painful in some ways and helpful in others. The key is being prepared to take advantage of the situation.
-
When to Sell Your StockKnowing when to sell a stock is a major decision investors must make. While there's no one correct answer, we look at some best practices here.
