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Portfolio Stress Test

Review Your Investments Before the Next Panic. Better to Act than React.

This time last year who would have thought that the price of oil would drop to today’s levels? Or that slowing growth in China would send shivers through the market?

Barely seven years after the financial crisis, it already feels like a distant memory—and rosier than it was. Test your own recollection of the bear market: Do you remember correctly that between October 2007 and March 2009, the U.S. stock market dropped in price by 57%?

Most investors build retirement portfolios with one goal in mind—to maximize returns. Does that take into account reality? Probably not. On the other hand, you need to understand the cost of being overly cautious also. Risk and returns frequently go hand-in-hand. If losses cannot be tolerated, then long-term return will be decreased along with risk levels, which will mean that retirement goals must be reassessed.

If you think stocks can’t fall by at least 50% again, you are wrong. If you think that you (or anybody else) can know exactly when that will happen, you must have a very reliable crystal ball!  And if you think you won’t overreact when it does, you had better test that belief now—before it is too late to find out you were kidding yourself.

The Federal Reserve annually examines large financial institutions to see how they would weather various significant financial stresses. The test simulates a crisis that includes a deep recession with a sharp rise in the unemployment rate, a drop in equity prices of nearly 50 %, and a decline in house prices to levels last seen in 2001.

How will you react to the next market crash? Look at your portfolio today, and then assume the market already declined by 40%. What would you have changed? This is similar to the stress test the Federal Reserve Bank performs on banks. If you had hindsight, what would you have changed? Think now about putting some of those changes in place before the next market decline.

If you have too much money riding on any one investment or strategy, set up a program to inch automatically out of it over time. How much is too much?  Any holding greater than 25% of the total portfolio is probably too much.

Consider your liquidity needs going out 24 months. Decide whether current cash levels are sufficient and what assets to sell if the need arises.

Better to act than react, especially at inopportune times.

If you would like to evaluate your portfolio, give Lineweaver Financial Group a call at 216.520.1711 to schedule a complimentary consultation.

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By Lineweaver Financial Group
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