Your Questions, Answered: Stress Testing Your Portfolio

September 10, 2020

On this week’s episode of Your Questions, Answered Chris Bixby and Brian Leitner discuss portfolio stress testing, and answer the following question:

“I’m planning on retiring in a year and am considering selling stock to be more conservative as I move into retirement. Is this a good idea?”

Do you have questions you’d like answered? Email them to QA@marinerwealthadvisors.com, and we’ll provide answers.

Transcript:

Brian Leitner: You have questions, we have answers. Back with another quick tip. My name is Brian Leitner and today I’m joined by Chris Bixby, a senior wealth advisor in our Bellevue, Washington office. Chris, thanks for being here today. 

Chris BixbyThank you, Brian. It’s good to be here. 

Brian: So Chris, we had a listener write in and their question was around portfolio stress testing. And they wanted to understand a little bit more about what that means and how we might approach that as advisors here at Mariner Wealth Advisors. So what are some of your thoughts? 

Chris: Portfolio stress testing in its essence is really understanding the range of variable returns that a portfolio could have. So by that, I mean, how high could it go? But more importantly, how low could it go? Now most of the time when they do it on something Meaning they’re asked a series of questions. Then on a scale of one to five, they’re determined how aggressive or how conservative they want to be. And so once you have that level of aggressiveness or conservatism, then now you actually know what the range of potential outcome, how far a portfolio could volatility. The problem with this approach is that a risk profile questionnaire is variable. It depends on how I’m feeling today. If I’m feeling really good about the economy, if I’m feeling really good about the market, then I might be willing to supposedly take more stress, more risk in my portfolio. However, when times are poor, when we’ve had market volatility recently, then all of a sudden, the emotions of investing get in the way. And so when we look at risk and stress testing a portfolio, a lot of times what we’re going to be doing is using statistics to actually see what is the total range of possibilities. And this can be very informative because when we’re doing financial planning, especially, it’s important to know what can your portfolio tolerate. And by that, I mean, you know, it’s good to know how far up and down a portfolio might be able to go, but what’s most important is what does this mean to me personally? What does this do to my life? You know, if someone is sitting there in their thirties and saying, I still have a 20 or 30 year time horizon before I need my money, because I’m saving for retirement, then volatility in the short term, doesn’t really matter to them very much. However, if someone is approaching retirement needs income from their portfolio are in retirement. Then now by using a financial plan and using risk testing, we can see what is the impact that a sudden downturn in the market can have. How much is it going to impact your cash flow? How much is it going to impact your ability to achieve your financial goals? And so that’s really what risk testing is about. It’s not just the statistics of risks. It’s how does that risk impact my ability to reach my financial goals and my financial objectives. 

Brian: Chris that’s terrific. Certainly appreciate that. So again, it’s the risk tolerance and wallet questionnaire might be a great place to start, obviously, you know, great advisors for just using that as a starting point and taking a much deeper dive. I also love the way you articulated the fact that it can change based upon the time of day or where we are in that economic. Most people are bullish when the market is, and I should say, I have a greater tolerance for risk in a bull market. But to something else. You mentioned here was not just the risk tolerance, but what I’ll call the “risk capacity.” Just simply goes back to that when you’re younger, the risk capacity side, you have more of a time horizon, the ability to ride it out. You could be a cowboy, but if you are in the later stages of life, you’re not earning any other income, you know, from a risk capacities standpoint. That might be quite low on your risk tolerance might be quite fast. That’s really informative. So as it relates to, you know, should I have a risk tolerance or stress test done on my portfolio, and how often should someone should someone reevaluate that? 

ChrisYou know, that’s one of those things that, uh, is a little bit, unique to each individual, because it depends on how often things are changing in your life financially. So what are things that can change in your life financially? Well, certainly a major economic change can affect your life and it warrants doing another stress test of your portfolio, but more importantly, it’s going to be weather if there’s something happening in your life financially. I remember a couple of years ago working with a client who said he had a great risk capacity with still working. He had a lot of income, could afford the ups and downs of the market. He’s willing to do that. And yet, as we started talking to him and understanding his goals and objectives, we realized that he had some significant capital distribution requirements over the next 12 to 24 months. We needed to go back and take a look at the risk of his portfolio, particularly to the things that were happening in his life. Someone is approaching retirement, someone is approaching a job change, and maybe they’re starting a business and going to have a lower income for a period of time. So anything that is changing in their life is going to require a new stress test analysis of their portfolio. But it is also something that should be done regularly. Every two years, I would say at most, it’s really good to go through and update your financial documents, your financial plan. And just as you’re updating your financial plan to go ahead and just run a risk analysis, a risk test stress test of your portfolio, and just see where you are and whether or not you’re comfortable with that level of risk. 

Brian: Chris, I appreciate that. Again, I love the way you position your thoughts around stress testing the portfolio. And I’d be remiss if I didn’t mention that there are a variety of ways to stress test your overall financial plan. I mean, there’s so many different ways to do that. Life doesn’t happen on a linear basis. So some of the random events that might come up or stress testing your plan, it looks really good today. You know, what can I do now to sort of ensure that that happens with the greatest probability of success? So, Chris, I really appreciate your time and thanks for answering our questions today. 

Chris Thank you, Brian. 

Brian: And if you or anyone else has questions they’d like answers to, please feel free to email us at qa@marinerwealthadvisors.com. Thanks for watching. 

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