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“Anything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen, that you’re still around to play the next day.” Warren Buffet

Our U.S. equity market, as captured by the S&P 500, has had an incredible run from its 2009 bear market low to date. In this bull market that is now into its seventh year, the S&P has risen approximately 180%. A very good showing to say the least! So, does this bull have more to run or are we on the cusp of a new bear market? Honestly, no one really knows.

Stress Test Your Portfolio

That’s why, as investors, even though we do not have a crystal ball, there are still some very useful tools we can take advantage of to enhance our investing success. First, update your Investment Risk Tolerance Questionnaire. Basic investing tells us that prolonged market advances breed complacency and greed within the investing “crowd”. A quick review of you goals, risk tolerance, and time frame will keep you from falling prey to this common human behavior.

Second, stress test your portfolio. Given today’s technology, there are many helpful tools available for you to run some diagnostics. For example, take a look at the output charts below. One is a Monte Carlo simulation of $100,000 fully invested in the S&P 500. The second is of $100,000 with 50% in the S&P and 50% in cash. Because of the excellent recent market performance, the fully invested portfolio is over two standard deviations of its long term average. This is a very richly valued market. The 50/50 portfolio drops the current standard deviation in half, but keeps the average return at two thirds of the fully invested one. Not bad!

Stress Test Your Portfolio

How this benefits you is that you can evaluate the potential range of values of your portfolio at future dates. For example, if you plan to retire in 10 years, you can examine the various compounded return levels to see if the bottom-to- median values provide an adequate retirement nest egg. Or, if your retirement plan includes purchasing a vacation home, diagnostic tools can help you align your asset allocation to best achieve the needed funds, without taking on excessive risk.

Immediately after the 2008 stock market plunge, I was struck by the number of people in or near retirement who had to dramatically adjust their plans. They had become accustomed to the market rising and were not prepared for a dramatic drop. Most admitted that they should have known better.  Although no one could have predicted the market crash, there were many signs of a market headed towards a transition, such as record levels of equity valuations, margin buying, and corporate buybacks, all again present today.  A disciplined stress test would have helped these investors maintain sound and reasonable expectations, and adjust their portfolios accordingly.

At Punta Gorda Financial Planning, we are available to help you perform such a test. Although no one can predict outcomes, we can determine reasonable probabilities and manage to desired ranges. Aligning your goals, risk tolerance, and time frame to practical portfolio return expectations will help you successfully navigate the unexpected challenges, as well as the opportunities, that the market presents to us.

Written by Thomas M. Geier, CPA, CFP®, PFS.
My aim is to offer clarity to your finances. I specialize in helping individuals and families determine what is most important in their financial lives, identify short and long-term goals, and make great choices for achieving comfort, security, and peace of mind.

I graduated from Loyola University in Baltimore, Maryland, and have been a Vice President of our investment management affiliate, Geier Asset Management, Inc, since its founding in 1999. I have over 25 years' experience in financial planning and investment management and am licensed as a Certified Financial Planner® professional, a CPA, and Personal Financial Specialist. I am member of the Personal Financial Planning section of the American Institute of CPS's and Florida Chapter of the Financial Planning Association.