The Market May Crash! Lifeboat Drills for Your Portfolio

Just like practicing a lifeboat drill on a ship, envision what you'd do with your investments if the market were to downturn.

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Market crashes are inevitable. They’ve happened regularly throughout history and will continue to do so—perhaps in 2025, or maybe not until 2030. No one knows exactly when they’ll occur, how severe they’ll be, or how long they’ll last. But what is certain is that they’re part of the investing journey. So, how can investors prepare for the next one?

Enter the Lifeboat Drill, a practical exercise designed to help individuals think through their responses to a downturn before emotions take over.

What Is a Lifeboat Drill?

Consider the preparation that happens before a cruise ship leaves port. Passengers are thrilled about the adventure ahead—bags are packed, drinks are flowing, and the promise of relaxation fills the air. But before the fun begins, there’s a mandatory safety briefing. The captain explains where to find life jackets, where the lifeboats are located, and how to respond in an emergency.

This briefing isn’t because anyone expects the worst, but because preparation is key. Similarly, investors need to prepare for the inevitable downturns in the market—especially after a strong period of gains.

Over the past couple of years, markets have delivered exceptional returns, leaving many feeling optimistic and eager to take on more risk. While it’s natural to feel confident during good times, it’s essential to consider what happens when the tide turns.

Imagining the Worst-Case Scenario

Here’s the exercise: imagine the market drops 25% next year. If you have $1,000,000 invested, that’s a paper loss of $250,000. How would you feel?

Of course, no one likes the idea of losing a quarter of their portfolio’s value. But more important than how you’d feel is how you’d act:

• Would you sell everything and move to cash?
• Would you panic and regret past decisions?
• Would you see the drop as a buying opportunity?
• Or would you stay the course, trusting in your plan?

Thinking through these scenarios now, before a downturn happens, can help you respond rationally when emotions run high. Having a strategy in place allows you to avoid snap decisions that might undermine your long-term goals .

Why Planning Ahead Matters

The Lifeboat Drill emphasizes the importance of having a clear plan that accounts for market volatility. Financial advisors often play a critical role in helping clients navigate these situations, offering perspective and guidance to keep emotions in check.

Planning ahead means ensuring your portfolio is built to weather storms. Your allocation between stocks, bonds, and other investments should align with your goals and risk tolerance. That way, when the markets experience turbulence, you’ll be ready.

A Sample Approach

For some, the best course of action during a downturn is to do nothing. Continuing regular investments, avoiding unnecessary portfolio checks, and sticking to a pre-determined plan can help maintain perspective.

This approach works when the portfolio is already aligned with long-term goals. Adjustments made during calm periods—when emotions aren’t clouding judgment—ensure that the allocation supports growth while minimizing unnecessary risk.

Take Action Now

Coming off another strong year in the markets, now is the time to assess your portfolio and overall financial strategy. Are you prepared for a potential downturn? Does your current allocation reflect your goals and your ability to handle market fluctuations?

If you’re unsure, consider running your own Lifeboat Drill. Picture the worst-case scenario and think through your potential responses. And if you need support, consult a financial advisor who can help you develop a plan that aligns with your unique needs.

Preparation is key to navigating the inevitable ups and downs of the market. By planning ahead, you can confidently weather the storms and keep your focus on long-term success.

Stay healthy, wealthy, and happy!

By Andrew Rosen, Contributor