BOSTON (MainStreet) -- In the aftermath of the financial crisis, banks had to perform "stress tests" of their viability and ability to withstand economic shocks.
The same concept has long been a part of professional portfolio reviews, but it's a process most people either don't fully understand or simply neglect.
|Can your investment choices take a shock to the system? A stress test may help insulate you from shock, just as tests from a doctor can set you on the right path with medication, diet and exercise.|
How would your portfolio of investments weather a shock? Is it structured to fend off the asset-eroding potential of triggers such as so-called Black Swan events, Black Monday-level market implosions, interest and inflation rate swings, war or an oil supply disruption? Unchecked, international matters -- sovereign debt, an Asian currency crisis or Russian devaluation -- can also take a toll.
"Unfortunately most people don't truly have a plan when they invest," says Mickey Cargile, CFP, managing partner of Cargile Investments. "The first thing they need to do is decide how much of their money they want in safe investments and how much they want in risk. Part of a stress test is to understand how both parts work together and to also monitor the performance and make sure you are getting at least a fair return for the risk you are taking."Cargile says investors can start by looking at their "risk" assets, money invested in the stock market, and compare the return on that money to those of an index such as the S&P 500. "If your portfolio is down because the market is down, usually that's OK," he says. "But if you are down and the market is higher, you know that you are taking more risk than you are compensated for and need to make adjustments." Cargile says this knowledge, combined with a more holistic look at all assets, shouldn't be a daunting prospect.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV