I hate boat drill. It’s that time when on a cruise, just after you have got to your cabin and are ready to plop yourself down on a deck chair with a whopping portion of ice-cream and a bucket of beer that an alarm sounds, and you must go to your muster station.
Life Boat Drill on ships is a requirement of all vessels subject to SOLAS and US Coast Guard regulations, it’s purpose is to familiarize all the passengers onboard the ship with what to do in the event of an emergency at sea. You are prodded through to the muster station, where you meet with the commander of the station and log in your name, and then stroll in an orderly fashion towards the lifeboat ready to be lowered to the safety of the shark invested ocean.
I hate boat drill because I had to lead these folks through these steps in order to help them to their destination, nobody paid attention, nobody really knows where to go or what to do, and you herd them like cattle, sometimes they might actually listen. The reality is, that in the event of a real emergency it would be a nightmare to control these people, they know what they should do, where they should go, how they should act… but in the event of a real emergency, forget women and children first, it’s every man for himself.
The problem with boat drill is like any other simulated emergency, you don’t pay attention, you half listen and then when things really go to hell in a handbasket you run around like a headless chicken doing all the wrong things.
The same is true of your financial decision making. When things are good, you don’t pay attention, you half listen, nod, and whatnot, and do whatever it takes to get back to that bucket of ice-cream and glass of beer on the sofa. This is because we generally don’t like facing real fears, and when separated from an events severity, do not emotionally attach ourselves to it.
Understanding Emotional Detachment
The key to test your ability to react properly to a real emergency is to ensure that you can attach yourself to the outcome, accept it, however bad it might be. Any other approach than this will lead you to failure. Emotional Detachment occurs when you ignore, either consciously or unconsciously the impact to your own personal situation. Here is how to make sure you have the right mind set in the event of a real financial emergency, the secret is to make everything personal. Because when it really happens, this is the only way you will be thinking about it.
Event- Stock Market Drops 50%
I am a strong proponent of stock market investing, but I believe if you aren’t comfortable in the knowledge that the market could drop 50% then you shouldn’t be in it. In order to make sure you really understand this, don’t think of the event as being the stock market, reframe the situation to being your own personal investments:
Personal Impact on a 80/20 Stock Bond Portfolio
- My portfolio will decrease by 40%
- My retirement plan has been changed.
When reviewing your exposure, make sure that you use words like MY rather than THE and really try to think about it from that personal impact perspective. If you can do that, it is the best way that you can prepare for the worst, and navigate it safely. Can you handle it? If you are young and you have a relatively smaller portfolio it should be easier to find this agreeable, as it is likely that the portfolio will rebound in time, and may present buying opportunities. If you are older, perhaps just retired, if this happens would your reduced balance provide enough money to support you in retirement?
Can you accept the risk? It has to be a decision you make properly. If it drops, can you wait it out?
The reason is simple, just like in boat drill – the market does drop 50% you are supposed to hold, actually it is a buying opportunity, but as soon as it stops becoming the market and starts becoming your money and your retirement emotions come into play, and the weak and needy get trampled on the race to the nearest life boat.
Other events can happen that can impact your saving goal, interest rates and inflation can fluctuate, and likely are going to make some noticeable changes in coming years, but these will be slow moving enough to plan around and predict, it is in the moment of shear panic that you need to keep your head. Take a moment to review your asset allocations and decide if you are comfortable where you are currently, and if you think you can keep calm in the event of a real emergency.
If you do decide to move allocations around to find somewhere closer to your comfort level, realize that adding in that level of security to protect your downside risk will frequently also reduce your ability to capture upside gain. The goal is to find that sweetspot in the middle where you have security, and comprehension of your position should things go wrong, or go right for your strategy. Realize also, that selling assets can create Capital Gains, so keep an eye on your basis and profit that is being released from the transaction.
If you have several accounts and investments it is a good idea to look at them overall for your exposure to such things by using a portfolio analyzer tool from Personal Capital, they are an affiliate partner of mine that I recommend for viewing your asset allocations overall, and seeing where you might be over or under exposed to both risk and reward opportunities.