Would Your Portfolio Withstand the ‘Stress Test?'
By Ryan Payne, President
Regrets are something you’re bound to come across when talking with market investors. It seems almost everybody has a story about a move they wish they had or hadn’t made, with the benefit of hindsight. One of the most significant regrets that I hear is: “I wish I realized how much risk my portfolio had before I took that big loss.”
A common investor regret is not realizing how much risk may be in their portfolio
Markets are cyclical, so what worked in the past often will not in the future
Conversely, investments underperforming now frequently come into favor later
This kind of statement often results from one of my least favorite investing mentalities, which is: “If it ain’t broke, don’t fix it.” Although that sounds good and could be very wise in many other walks of life, the problem in this context is that markets are cyclical.
Which brings me to one of my favorite sayings: “Don’t fall in love with your investments, because they won’t love you back.” What I mean by that is whatever works today most likely won’t continue to work in the future. Conversely, whatever isn’t working now probably will come into favor at some point.
I’ll give you a perfect example of this scenario, and why it’s important to know the potential risk in your portfolio. I met with a client about a year ago who had 70 percent of his money tied up in energy stocks. And up until last year, the longer-term performance of energy had been great. So at the time it was easy for my client to say, “Why would I change anything here, Ryan? This distribution has done extremely well for me.”
To illustrate my point, I ran what we call the “Portfolio Stress Test” and showed him that if he looked back to 2008 when energy stocks took a big hit, his portfolio would have plummeted 40 percent. So with my client now recognizing the risk, we took the time to proactively diversify.
But had he stayed with his previous portfolio, it would have declined another 40 percent when energy prices crashed earlier this year. So I can’t emphasize this enough, especially when things are going well, you need to understand why that’s happening and the potential risk you’ll have in the future. Put your portfolio to the “Stress Test.”
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Payne Capital Management, LLC), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Payne Capital Management, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Payne Capital Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Payne Capital Management, LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request.