It’s Time to Stress Test Your Portfolio

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By Casey Franken, Wealth Advisor, CFP

The year 2020 has brought us a global pandemic, a topsy-turvy economy and a viscous election season. Now, more than ever, you need make sure you are assuming the right amount of risk for your situation. Risk tolerance and capacity can change over time. Stress testing your portfolio can assist in not taking on more risk than you need to achieve your desired goals. Here are three things a stress test will reveal.

 

How much are your investments correlated?

A correlation matrix gives an idea of how much of your investments are related to each other. You don’t want all of your investments behaving the same way all the time. This is the fundamental concept of diversification. Metaphorically speaking, you don’t want to own seven different flavors of chocolate. You want to make sure you have some “fruits and vegetables” as well because they will help mitigate risk in turbulent market seasons.

What are your overall expenses?

Fees are very important to long-term investor returns. In our experience, we have worked with many clients that have mutual funds in their portfolio and they are unaware of the underlying expenses to own those funds. Additional fees, many times, are “under the hood” and not reported to the investor. A fee analysis will help showcase the overall costs of an investor’s portfolio.

How have your investments performed over time?

We say it all the time, past performance does not indicate future returns. However, it is important to gauge the performance of your investments this year. How did your portfolio react to the stock market declines in the spring of 2020? Did they decline further than you had expected or felt comfortable with? A quantitative analysis can help you determine if changes are warranted to help navigate through future downturns and volatility.

If you would like to consider a stress test on your portfolio or need a second option, please, give us a call at (605) 271-6023 or visit www.pinnaclewealth.com to setup an investment review meeting today. A diversified portfolio does not assure a profit or protect against loss in a declining market.

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