Conducting a financial fire drill with your financial advisor is a great idea
The pictures are heartbreaking as destructive wildfires continue to sweep across much of the western United States. In fact, as of mid-July, there were more than 50 large fires currently burning almost 1 million acres. And for 2021, there have been over 33,000 fires – the most in over a decade – destroying almost 2 million acres, according to the National Interagency Fire Center.
How would you react if the news came that a fire was heading in your direction? Would you scramble to protect your home and family, uncertain of where to begin?
Or, would you calmly pull out a detailed plan for such emergencies? Would your family be ready to evacuate quickly with essential supplies? Would your house be secure?
Plan for Disaster
Planning for a disaster is no different from other measures you probably take to protect yourself and your family from potential hardship, such as insuring your life, saving for retirement, and getting regular medical check-ups. But preparing for a disaster does take a small investment of time and money. Even a very basic plan could one day save you and your
loved ones from ruin.
But maybe you live far away from the wildfires and think you don’t need to plan? Think again.
A Financial Fire Drill
Here is a smart move that every investor can take: conduct a financial fire drill with your advisor. That’s where you go over what can go wrong, because it has before, and how you react.
Why? Because preparation thwarts panic. And panicked people make rash and foolish decisions.
Clearly, reducing the inevitable panic is vital if something goes wrong, whether it’s a fire, a collision or some other catastrophe. Because you never know when disaster will strike.
Every investor should go through a life-saving financial drill with their financial advisor. You should talk about the bear markets that have occurred since the 1940s to ensure you are not surprised when these slumps happen (a bear market is when stock prices decline by 20% or more). You should understand the reasons behind our past recessions, as well as its definition (a fall in GDP for two consecutive quarters).
A worthy goal is to understand that emergencies are more common than most believe, so you will not be surprised when they occur.
Planning Matters
During this financial fire drill, go over what needs to be done during those bear markets so you can still reach your financial goals. Talk about how during the inevitable bear markets – which occur every few years – maybe you should rebalance your portfolios and purchase additional investments of whatever has become suddenly cheaper.
Here’s the thing: bear markets are normal for investing and so are the doom-finders that will describe the downturns as the end of the world. These pessimists insist that the current slide is unprecedented, saying: “It’s different this time.” Those are the most dangerous words in investing. Recoveries inevitably follow.
Unfortunately, some investors sell all their stocks and park the diminished proceeds in cash, where it earns next to no interest. When that recovery comes along, they are out of the market. Hence, they lose two ways.
Firefighters want you to understand the potential risks and the proper actions to take in an emergency.
The same holds true for investors.