What should you know?
Lifeboat drills are performed on boats to familiarise the crew and passengers both practically and physiologically on what to do if there is an emergency. Importantly, they are conducted in port before the ship sets sail, not in the eye of the storm. This is when minds are clear, emotions are calm and the boat is steady and safe.
A similar principle can be applied to prepare investors for the periods of rough seas of investing.
By being prepared, you can calmly ride through storms when they come (and these times will come).
Why should you care?
Good Financial planning is as much about emotional control as it is financial knowledge. Practicing good habits and preparing mentally for rough seas, will give you the confidence to confront any situation with calm rationality.
A number of scenario planning tools can be used to test the resilience of your financial plan. Monte Carlo modelling, simulation of theoretical market events, and back-testing against real past market movements are all useful in determining the solidity of your financial foundations.
Being able to keep sight of your investment objectives during stormy markets is a key factor in long-term success.
