Scenario planning for a stock market crash: base case, correction, crash

What is scenario planning for a stock market crash?

Scenario planning is a method for deciding without a forecast. According to Wikipedia, Pierre Wack started it in business in 1971 at the Royal Dutch Shell group of companies, and the oil shock two years later gave it momentum. The idea travelled because it fits any field where the future has several plausible paths and one wrong bet is costly.

For a stock market crash, the method asks 3 questions in order: what could happen, how would we notice, and what would we do? The answers form a short document that anyone in the household or the firm can read. The document replaces a debate about whether a crash comes with a plan for each path.

Which 3 scenarios belong in a stock market crash plan?

The base case is the path where growth continues and markets move within a normal range. The correction is a notable fall that recovers within a modest period. The crash is a sharp, fast fall across the whole market, with stress in credit and jobs. Each label is a story with conditions, and no official threshold separates them.

3 paths keep the set readable. Fewer than 3 hides the downside, and more than 5 turns the plan into a library that nobody opens. If a fourth story matters to your case, such as a long stagnation, add it only when it changes an action. Each scenario earns its place by changing what you do.

What 5 parts make up a crash scenario in a written plan?

Write each scenario in 5 parts: a story in 3 sentences, the drivers behind it, the signals that confirm it, a duration, and the actions it triggers. Keep the story concrete. For the crash, name how your income, your credit, and your portfolio would each be hit, since a plan needs those details.

For duration, borrow from the record instead of guessing. The National Bureau of Economic Research dates US recessions at 8 months in 2001, 18 months from December 2007 to June 2009, and 43 months from 1929 to 1933. Using that range as a bracket, a crash scenario can plan for a short case and a long one.

How should weights be assigned to crash scenarios?

A weight is a judgment about how likely a story is, written as a share of 100%. Weights such as 60%, 30%, and 10% serve as placeholders that show the form, and your own numbers come from your reading of the evidence. The shares must add to 100%, which forces a trade-off: raising one scenario lowers another.

Knight’s distinction between risk and uncertainty explains the limit: the weights stay judgments, since the odds of a crash cannot be measured like a coin toss. Their value lies in discussion and in change over time. When the weight of the crash rises from one quarter to the next, the plan flags it, and the conversation starts earlier.

Which actions belong to each stock market crash scenario?

Sort actions into 2 groups. Moves that suit every scenario, such as a cash reserve for essential costs and a written rebalancing rule, come first because they cost little and protect in all cases. Moves tied to one scenario, such as raising the reserve when the crash weight climbs, wait for a trigger.

The table pairs each scenario with a signal and a first action. In the base case you keep saving, in the correction you rebalance by rule, and in the crash you draw on the reserve before selling long-term holdings. Writing the pairs in calm conditions keeps the first reaction in line with the plan.

Which signals show that a crash scenario is unfolding?

Choose signals you can observe and date. Useful ones come from your own situation: a fall in portfolio value that reaches your limit, a rise in the cost of credit, a layoff in your sector, or a lender that tightens terms. Each signal belongs to one scenario and moves its weight up or down.

Pair every signal with a check date, such as the first Monday of each month. A signal that you look at on a schedule produces fewer surprises than one you notice in a headline. If 2 signals of the crash scenario appear in the same month, the plan calls for a review of the weights.

How often should crash scenarios be reviewed and replaced?

Review the set once a quarter and after any large event. Check which signals appeared, adjust the weights, and retire a scenario that no longer changes an action. Keep the old versions in a folder, because the history shows how your judgment evolved and where it missed.

A simulator speeds up the review. The Λ simulator compares options in a soft landing, a correction, and a crash, the pricing page lists the EQOS Asia formats for larger decisions, and the contact page opens a pre-diagnostic. As of October 2026, a short quarterly review beats an annual rewrite.

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About the author

Stéphane Jambu

President, EQOS Forecast Asia

Stéphane Jambu leads EQOS Forecast Asia and works as a consultant in e-commerce, search visibility, and AI. LinkedIn profile