Stress-Testing Portfolios

Have you Stress-Tested Your Investment Portfolio?

You may be familiar with the term “bank stress-test.” But do you know what it is? The 2008 financial crisis revealed bank’s vulnerability to market crashes and economic downturns which changed the way they think about risk.

A bank stress-test is required for banks with $50 billion or more in assets. It is an analysis conducted under hypothetical scenarios designed to determine whether a bank has enough capital to withstand a negative economic shock. The objective is to look at unfavorable situations, such as a deep recession or a financial market crash and determine the impact. Big banks are required to undergo internal stress- tests to check the health of their balance sheet based on credit risk, market risk and liquidity risk.

At Longevity Capital Management LLC, we feel all portfolios should be stress-tested for risk. That is why we continuously stress-test our client portfolios as a part of our ongoing portfolio management and monitoring. Our goal is to detect the potential of a given portfolio to withstand a major market upset or economic crisis. We feel this is important to exam in advance since such upsets tend to occur unexpectedly and without warning. We attempt to use hindsight to our advantage. The goal of stress-testing is to be able to strategically navigate through challenges without compromising your long-term financial independence.

We believe stress-testing (or crash-testing as it is sometimes called) can be an invaluable, forward looking analysis and yet we find it is often overlooked by individuals. How important is it to you to know how your portfolio may react should interest rates rise sharply or if there is a major economic crisis? Since a portfolio can be adversely impacted by interest rate changes, stock declines, sharp changes in commodities prices or even changes to geographic markets, such as the US, Europe, Japan or emerging markets, the goal for comprehensive portfolio management is not to only pursue opportunities, but also understand a portfolio’s weaknesses or vulnerabilities.

We know past performance is not a guarantee of future results and most investors understand there is uncertainty associated with investing, but do you really know how much risk your portfolio subjected to right now?  This is especially important to consider when managing your retirement savings, because it could be irrevocably damaged by substantial losses.

We feel it is critical to be prepared for these potential impacts by testing how your portfolio responds to various simulations. This may be especially valuable if you plan on transitioning to retirement soon. Since so few retirees these days have guaranteed retirement income other than Social Security, many of us are far more dependent upon our 401k, IRAs and personal savings than ever before.

How would a global stock crash, hyperinflation, economic meltdown, stagflation, oil shock or other calamity impact your retirement plan? If you want to know, we encourage you schedule a complimentary consultation to discuss our stress-testing process. For some, such a catastrophe could force a cut in income, compromise savings and/or result in financial hardship.

Stock Market Risk

Stock Market Risk

Stock Market Risk

At our firm, we follow three steps that incorporate stress-testing into our portfolio management process. By integrating structure and predictability into our process, we believe we can add significant value in a way that can be easily understood.

In case you haven’t noticed, the stock market has been booming. The S&P 500 Index has increased 237% in the past decade (as of 7/7/2021), and the NASDAQ has gained 432%. To put that in context, during the prior ten-year period (from July 2001-2011) the S&P 500 gained only +0.63% and the NASDAQ +25.25%, according to Morningstar Data (not including dividends).   

Here's how we do this:

1. Step One

The first step of our process involves comprehensive planning. It starts with developing a comprehensive financial plan to align your resources to your needs and desires. A key part of the plan is analyzing your resources. We call this portfolio deconstruction. The objective, among others, is to identify your long-term average annual return target required to meet your goals. This is the starting point of our portfolio analysis. We seek to answer the key question: Does the annual long-term average return potential of your portfolio match the long -term annual return you need to meet your lifetime retirement goals?

This step involves a careful and complete portfolio analysis. Think about this step like the performance testing of a car, such as testing speed, handling, durability, and reliability. We want to be sure the performance of your portfolio can support your goals, even if faced with challenging circumstances or under stress.

2. Step Two

The second step is to analyze the most negative events and projected impact as various simulation tests are run on your portfolio. Like auto manufacturers, we perform various “crash tests” to help us better consider decisions about portfolio design and risk management. The purpose is to help you understand how your portfolio might perform in the event of a severe recession or economic calamity, and then measure and quantify the risk.

3. Step Three

The third step in our process is to determine the best approach to managing risk. We seek to be proactive rather than reactive to crisis, so we adjust the portfolio based on your desired strategy, while still seeking to meet your long term rate of return goals. While these two objectives may be contradictory, our stress-test is a key part of our portfolio management process. When we complete this analysis, you may not be happy with the stress-test outcome. For instance, if the hypothetical losses appear to be greater than you are comfortable with, or more than you can afford to lose, it may be time to proactively adjust your portfolio.

We apply this simple three step process to connect your investment goals and risk tolerance as one interconnected workflow. At our firm, our dynamic and active portfolio management seeks to ensure your portfolio is appropriate relative to the risk/return tradeoff, in both good markets and bad

At Longevity Capital Management, we strive to help you reach your goals and enjoy an independent retirement. We realize investing may appear deceptively easy during the good times, but we want you to be confident no matter what the future may bring. During periods of financial stress, we know the best of plans can be turned upside down. Having spent over thirty years helping clients navigate retirement, we know how dangerous it can be to be caught unprepared, especially as you near retirement.

If you want to better understand the impact of possible losses before they occur (such as inflation or a market correction),  I invite you to give us a call or schedule a no-cost no-obligation consultation and learn more what we can do to be of help. We believe our approach leads to better served clients, which is why we are proud to say our average client relationship is over twenty years and going strong.

Client Centered

Client Centered

Our business is built on a foundation of thoughtful client relationships. We welcome the opportunity to meet you and learn more about your goals, your dreams and your needs as we strive to help all enjoy financial independence.

Terri McGray, CFP®, AIF® is founder and president of Longevity Capital Management LLC. She has built our company with a focus on driving retirement readiness and helping individuals work towards success.

Click below to schedule a complimentary consultation with Terri McGray, CFP®, AIF® so we can learn more about you and you can learn more about us.

Heather Smallwood

Client Service Manager


Heather is dedicated to guiding and managing a seamless client experience. Her goal is to provide valuable support and assistance to all clients. She takes great pride in her work, thinks like an owner, and understands the importance...

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Ken Dawson



As a former teacher, Ken Dawson has always prioritized the importance of education in financial planning, where he has assisted with building and maintaining comprehensive financial plans since 2012.  No stone goes unturned when...

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Randall Cohen

Director of ERISA Services

(805) 917-6771

Working with plan sponsors to help them achieve their retirement plan goals while providing the peace of mind that comes from a fiduciary standard of loyalty and care, Randall Cohen provides the specialized knowledge and tools to help...

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Terri McGray, CFP®

President | Wealth Advisor

(805) 917-6771

(805) 601-7024

Since 1988, Terri McGray has been assisting individuals, business owners and families with comprehensive wealth management. She has helped thousands of individuals and business owner’s enjoy a smooth transition into retirement....

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