Before the Next Time Markets Sink, Do Your Lifeboat Drills

(Image credit: Getty Images)

published 19 January 2025

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.

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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!

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In March 2010, Andrew Rosen joined Diversified, bringing with him nine years of financial industry experience. As a financial planner, Andrew forges lifelong relationships with clients, coaching them through all stages of life. He has obtained his Series 6, 7 and 63, along with property/casualty and health/life insurance licenses. Andrew consistently delivers high-level, concierge service to all clients.