When I think of a stress test, I imagine a patient in a doctor's office, running on a treadmill, with tons of sensor patches connected all over the chest. The point of the stress test is to measure just how much that patient's heart can take.
I think it's time to stress test your investments.
The stock market's recent volatility has investors thinking again. What if we have another market correction? I don't think about "what if" as much as "when." We live in an unpredictable world. Those uncertainties can often translate into stock market fluctuation or even a severe correction. There's no better time than now to start planning for the unknown.
If a severe bear market occurred this year, could you still fund your financial goals and lifestyle?
Could a severe market correction occur at your personal worst time, like a year or two before retirement?
How do you stress test a portfolio?
Why, through financial planning, of course! I use financial planning software that will illustrate a severe decline of 40 percent, or even if you are unlucky enough to have bad timing for a goal. With financial planning it's sometimes hard to predict a future result. However, we can show the impact of a specific type of event on the success of your plan. Based on your current goals, portfolio value and time frame, we can illustrate just what such an event will do to you. My point here is this: It's better to know the worst-case scenario and plan accordingly.
I didn't pass. Now what?
It's definitely a wake-up call. It means something needs to change. Either you need to change your risk tolerance up or down or you need to start saving more. If you are retired, your options are very different, like risk reduction or more stable investments.
What are you afraid of? What keeps you awake at night?
It's the not knowing for investors that I think drives them crazy. By stress testing your investments, you eliminate much of the unknown. You'll know exactly what to do and how to handle the next severe market correction. That way you don't panic. We all know that emotion and panic cause investors to make really bad decisions.