No longer “What If” but “When.” How is your portfolio reacting?

Chad Hassinger |

By Bradley J. Rathe, AIF®
Chief Investment Officer

The quality of an investment portfolio is not only measured by its performance when the market is doing well but also by how well it withstands changing markets and volatility. There are thousands of "what if" scenarios that can negatively affect your portfolio. Any single scenario can have a dramatic adverse effect. Imagine the effect of multiple events hitting at once, as we see now. To get a portfolio stress test at no cost to you click here!

If your portfolio has lost value, you may be asking yourself if you could have protected your portfolio so it would have performed better than it is? What should you have done and how would you even know where to start? Would the actions that you were thinking too, but did not take, have made a difference? All good questions. 

To answer these questions, let's first understand what a "what if" scenario is. It is an economic, geographic or political event which has the potential to impact your investment returns. You may recognize some of these examples because we are experiencing them today.  For example, tariff wars, Federal Reserve raising interest rates, stretched valuations, China slowdown, oil price drop, increasing healthcare costs or the debt cliff.  

The above examples are scenarios that currently are impacting the markets and, therefore, may be affecting your returns at this very moment. Unfortunately, these and other events are all hitting at once. If, during the portfolio design stage, you proactively consider different "what if" scenarios, your portfolio design may be adjusted to minimize any adverse impact stemming from such scenarios. 

How do you incorporate scenarios into your portfolio decision-making? The simple answer, you stress test your portfolio. A portfolio stress test will simulate scenarios that will show you how your portfolio may behave. Stress testing platforms use historical data, long-range, forward-looking forecasts, and leading-edge Artificial Intelligence. 

Good portfolio stress tests allow you to visualize the effect of scenarios on your portfolio. Strategic Financial Group’s portfolio stress test relies on over 90 built-in scenarios and hundreds of custom scenarios that can be built based on almost any situation. Once your portfolio has been subjected to a stress test and has been adjusted as appropriate in light of the stress test results, you are likely to experience the peace of mind that comes from knowing that you have taken proactive steps to prepare yourself for the potential occurrence of certain “what if” scenarios.  

Let's now answer our earlier questions. First, if your portfolio has lost value, you may be asking yourself if you could have protected your portfolio to perform better than it is? No shield exists that can make your portfolio adverse effect proof. However, by performing a portfolio stress test, you can see how a multitude of events can affect your investments and, after making certain adjustments to your portfolio based on what you have learned and based on your risk tolerance, can see if your portfolio’s risk exposure has improved. That is the key. To find a suitable allocation, it is helpful to quantify the portfolio’s risk exposure (through an analysis that includes a stress test) and what your risk tolerance is. 

Second, what should you have done and how would you even know where to start? If you haven't already guessed, you could have run a portfolio stress test. It is an easy starting place. Having the ability to see how different scenarios may affect your portfolio gives you the opportunity to reallocate and rebalance. Many investors are not taking advantage of these powerful stress testing tools or even know they exist. Follow the lead of some of the world’s wealthiest investors by taking advantage of one of their “secret” tools.

Finally, would the actions that you were thinking too, but did not take, have made a difference? Obviously, the market is unpredictable. But being prepared can help you mitigate the adverse effects of certain risks to which your investment may be exposed. The hardest part of being an investor in a volatile market is the worrying. Such worrying often is the result of a realization that one has not adequately prepared.  Even if you have dedicated substantial time to trying to construct a robust portfolio, assessing the potential effects of scenarios is complex.  Even more so, when you try to take into account the effects of multiple scenarios that may occur concurrently.  The use of sophisticated tools to model potential future scenarios and potential effects on investment portfolios is of great help. When your investment portfolio is subjected to a stress test, you are armed with the knowledge that it provides, you are able to visualize the effect of potential scenarios, and this knowledge is likely to give you more confidence in your portfolio allocation.  This confidence, in turn, is likely to help you react to actual events that occur from time to time in a calm and rational, rather than emotional, hasty or irrational, manner. 

Now that you know about the powerful features and benefits of a portfolio stress test, schedule your own investment portfolio’s stress test.


Unless otherwise expressly indicated, the opinions or views expressed in this article are the author's own and do not reflect, and may differ from, the opinions or views of Strategic Financial Group, LLC or others within Strategic Financial Group, LLC, including its officers, managers, owners, employees or other service providers.