The Market is Going to Crash! Lifeboat Drills

The Market is Going to Crash! Lifeboat Drills

My good friend and industry icon John Anderson, who I have the pleasure of working with, reminded me of this nugget a month or so ago.  It comes from another industry icon Nick Murray and I absolutely love this advice.  They, and now I, call it the lifeboat drill and it goes something like this.

Lifeboat Drills

There will be a market crash in the near future (in my opinion), sadly I have no clue if it is 2025 or 2030, but trust me it happens every 4 years since the dawn of time.  Not only do I not know when, but I don’t by how much or for how long.  I know, filled with great information here so far, but stick with me would ya?  It is coming for us all and you simply can’t avoid it.  Now what?

This is the exercise that is fantastic to remind yourself of during times like these.  The stock market came off another historic year of 20% plus returns and we are all feeling pretty good about it.  May I remind you that 2 short years ago inflation was running rampant and bonds had their worst year, well ever. 

Now, if we were on a cruise ship about to take off in Florida we would all be pretty excited about what lies ahead.  Suitcases are unpacked, and you are heading straight to the bar to get that first vacation cocktail.  But before you do the captain comes on the loudspeaker (never been on a cruise so assuming there is a loudspeaker) and announces key safety concerns.  He tells you where the lifeboats are, where the flotation devices are stored, and how to handle yourself in an emergency.  They do this to make sure you are prepared for when you hit rocky waters, and of course in a true emergency.

This bodes the question of: have you looked at your finances and investments to determine how they and you are positioned for a market downturn?  After two great years in the markets, more clients are asking about how to increase their risk exposure than decrease it these days.  In theory, I take no umbrage in this but it is important to be cognizant of what you are doing.  More importantly, you should be aware of what this means for when markets turn in the other direction, which they inevitably will do. 

What If?

The lifeboat exercise is basically this.  Picture the markets going down 25% next year, as in literally if you have $1,000,000 of investments to start the year assume to end the year it is worth $750,000.  Now how do you feel?  Trick question there as of course you feel crappy you just lost, on paper, a quarter of your net worth.  More importantly, what will your actions be if/when this scenario transpires?  Will you sell everything and go into cash?  Will you scream and yell at us during your next checkup meeting?  Will you throw more money in?  Or will you sit on your hands and know it will recover and are positioned to do so?

The point is that it is critical to run this scenario through your head and game plan for how you will act and react during these circumstances.  Heck, this is exactly why you have a financial advisor to help guide you through these situations and even game plan for them.  These are highly emotional circumstances and it is critical that you plan ahead of time rather than react irrationally in the heat of the moment. 

What is my plan?  Personally, my plan of attack when this happens is to do virtually nothing.  I’ll continue plowing my monthly investments into the markets, and if I have extra cash candidly throw more in.  I won’t look at my portfolio nearly as much during those times as to not tempt me to do something ill-advised. 

My asset allocation between stocks and bonds reflects this today and thus I see no reason to adjust during a market downturn regardless of timing or severity.  This is my best guidance to you, but make sure your current allocations reflect that so when the time comes you can act accordingly as it is the only way I know how to get through those rough seas.

Thus, I highly suggest coming off another banner year you either take a look in the mirror or have us help you do so, to plan for those lifeboat drills.

Stay wealthy, healthy, and happy everyone!