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Financial Fire Drill

July 23, 2013
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By Dan Crimmins

Learn more about Dan on NerdWallet’s Ask an Advisor

A smart move: 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. Preparation thwarts panic. And panicked people make rash and foolish decisions.

This was driven home to me recently, when my wife Maureen and I took a cruise from Bayonne, N.J., to Bermuda. She gets seasick, but we thought this route would be calm. Well, not so much. While we had a great time overall, the ship encountered some choppy seas. One night at sea, we awoke to the sound of the closet hangers sliding rapidly from port to starboard. Future vacations will be land-based for a while.

Still, as first time travelers on a cruise ship, we felt good about the mandatory exercise that all must undertake while the ship is setting sail. Regulations require that everyone participate in a fire drill. Veteran voyagers likely know about the life vests and heading to their assigned lifeboats, yet need to be reminded.  Newcomers like us had to get the procedures down in the event of an emergency.

Clearly, reducing the inevitable panic is vital if something goes wrong, whether it’s a fire, a collision or some other catastrophe. You never know when disaster will strike. In January 2012, the Costa Concordia cruise ship, with 4,200 aboard, hit rocks and capsized off the coast of Italy. The death toll is 28. Officials blame the captain for sailing too close to the shore.

This same need for a disaster practice applies to people as they embark on investing. Thus, my firm goes through what we call the life-saving financial drill with clients. We talk about the bear markets that have occurred since the 1940s to ensure the people are not surprised when these slumps happen. A bear market is when stock prices decline by 20% or more.

Our aim is to help clients understand that emergencies are more common than most believe, and thus not to be surprised when they occur. As Nick Murray, the noted author and financial speaker, states: “Surprise is the mother of panic.”

During this exercise, we go over what needs to be done during those bear markets to help people reach their financial goals.

We stress that during the inevitable bear markets – which occur every few years – we rebalance their portfolios and purchase additional shares of the great companies in the U.S. and overseas, now suddenly cheaper. We help clients understand that bear markets are normal for equity investing, and that doom-finders always describe the downturns as the end of the world. These pessimists, we tell clients, insist that the current slide is unprecedented, saying: “It’s different this time.” Those are the four 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.

Maritime regulations require that anyone boarding a cruise ship understand the potential risks and the proper actions to take in an emergency. The same holds true for investors.

Dan Crimmins is founder of Crimmins Wealth Management, LLC and a fee-only independent financial advisor.


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