Portfolio Stress Test

Portfolio Stress Test

I’ve recently debuted a new tool in my financial planning business. I call it the Portfolio Stress Test. You’re probably familiar with the idea of stress tests in the health arena. Maybe your doctor has put you on a treadmill to see how your body reacts to a variety of exercise activities. Tests like these show us where we need to improve our health to avoid trouble down the road. That’s exactly my goal with the Portfolio Stress Test.

What the Portfolio Stress Test does is checks to see if a portfolio is prepared for the next ‘big thing’. Our economy is big and complex, and from time to time, big unexpected changes come our way. (Kind of like finding out the arteries in your heart are getting clogged). Take inflation, for example. Surprisingly high amounts of inflation can throw people’s investments into chaos, as they suddenly aren’t earning enough to keep up with inflation. Would you want to know if your portfolio is too vulnerable to inflation? Of course you would – the same way you’d want to know if your heart wasn’t strong enough to run a marathon.

My Portfolio Stress Test actually measures seven different kinds of stress that can give a portfolio a stroke: strong economic expansion; tough recession; high inflation; unprecedented deflation; a strong dollar; a weak dollar; and Black Swans.

What’s a Black Swan? A Black Swan event is a completely unexpected, high impact event that pulls the whole financial world down with it. In short, do you remember 2008? 2008 was nothing but one big Black Swan event, as far as I’m concerned. But there’s good news: Black Swans in the financial world, like their counterparts in the natural world, are few and far between.

The important question to ask yourself about your portfolio is not whether one of these problems will ever hit your portfolio. The important question is which one is going to hit next – and when. An even better question is this: is your portfolio ready to handle what’s coming next, regardless of what it is? Is it ready to handle all seven of the big things that could be coming next? Would you rather have a portfolio that’s been stress tested against all the things you think could happen to it, or tested against all the things I think could happen to it? Get your portfolio stress tested today.

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