Lifeboat Drills: Financial Planning in the Good Times

Overall, the stock and bond markets have been very strong since late 2022, and as I write this in early 2025, the economy and the stock market are not showing signs of impending doom. However, when markets go on an extended run there is always concern that prices have risen too fast to be sustainable, and we’re hearing from a lot of clients that they are concerned about what might come next. 

While these concerns are valid, we need to remember that we can’t predict what will come next in the markets or how stocks might react to changes in the economy. But the time to do lifeboat drills is when the seas are calm, not after the ship has hit the iceberg. Having a plan in place, in both good times and bad times, helps ensure that we don’t make emotional errors in times of panic. 

For asset management clients, our approaches to dealing with market corrections fall into two categories:

1. Ongoing things we do regardless of market conditions.
2. Specific actions we plan for and implement when the markets get ugly.

Ongoing Portfolio Management

1. Review the risk/reward tradeoff with clients to make sure they are in the right portfolios. As part of the planning and review process, we are always trying to ensure that our clients’ portfolios match both the risk levels that work best for their financial plan and that are a good fit for their psychological risk tolerance. Understanding how your portfolio might behave in different market conditions before those conditions arrive, will help you weather those storms when they come.  The time to make those changes is before things get ugly.
2. We always assume that tough times will come without warning. Market corrections are a regular occurrence and when they arrive – whatever the cause – they should not be a surprise and should not require a change of course. We bake that assumption into our thinking when we construct portfolios and choose models. Lifeboat drills are part of the daily routine.
3. Diversification is one of the best defenses against prolonged market downturns. Our portfolios cover the entire market, stocks, and bonds, to avoid issues that can hurt individual companies, sectors, or countries. 
4. Our portfolios lean into “value stocks.” That means our models emphasize companies whose stock price has remained relatively low compared to company earnings. This emphasis helps protect against bubbles, when stock prices rise too quickly and get ahead of economic growth. 
5. Rebalance Your Portfolio. When markets go on extended runs, allocations get out of whack. We rebalance your portfolio back to targets regularly, whenever you add funds or make withdrawals, and then once per quarter. That means selling positions that are higher than their allocation targets and buying positions that are below allocation targets. This controls risk since it is generally stocks that have risen beyond their targets and added risk to the portfolio when things turn the other way.
6. Maintain / Top-off contingency funds and cash reserves. Part of a good lifeboat drill is making sure you’re well-positioned to weather a downturn when it arrives. If you have an adequate cash reserve on hand and have savings to cover known expenses for the next two years, you can avoid selling stocks during a downturn. The time to replenish those reserves is when the market is high – taking profits rather than losses.

During a Market Downturn

1. Roth conversions often look better during a market downturn. Converting funds from a traditional IRA to a Roth IRA means paying taxes now to get long-term tax-free growth. If you spend the money on taxes during a downturn, and the funds are in your Roth IRA before the market recovers, that recovery means you get more bang for your tax expense and end up with higher Roth balances. As part of lifeboat drills, consider whether a Roth conversion makes sense for implementation during a market correction.
2. Tax – Loss harvesting is selling investments that are at a loss to capture that loss for tax purposes. The sale proceeds can be invested in a similar investment vehicle and the losses can be used to offset gains on other investments or used to offset up to $3000 of regular income per year on your tax return. Excess losses can be carried forward to future years. When we create the models, we use in our taxable (non-IRA) portfolios, we have a primary position and a backup that we will replace it with if we want to capture losses. 
3. Dollar-cost averaging, buying a set amount of stock funds at fixed intervals, can be very effective during falling markets. Rather than trying to time the markets and guess when they have bottomed out, we work with clients to establish a plan to do so ahead of market corrections if they can continue investing or increase the portion of their portfolio in the stock market.

Predicting the Market

What’s missing from this list is any mention of trying to guess when a downturn might happen or shifting asset allocations during a correction. The best way to weather a market storm is to be prepared ahead of it, by having your portfolio and finances in order before it arrives and having smart strategies ready to deploy when the time arrives.

Conclusion

In conclusion, while no one can predict the future of the markets with certainty, preparation and strategic planning are key to navigating both market highs and downturns. At Shotwell Rutter Baer, we focus on proactive portfolio management and sound financial strategies to help our clients stay confident and resilient, regardless of market conditions. If you have questions about your retirement planning, portfolio management, or how to prepare for potential market changes, we’re here to help. Contact Shotwell Rutter Baer today to ensure your financial plan is ready for whatever comes next.

Call 517-321-4832 or email us at info@srbadvisors.com

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