If you are an investor with an investment portfolio, it is likely that you have hired a financial advisor who is guiding you throughout each process. Your financial advisor has the tools and resources to provide you with details about your portfolio analysis. In fact, the advisor will help you to figure out how each investment will react and how you should invest. Breaking news around the world has an impact on investments. For example, the slowdown in the Chinese market could be an indication of a recession. Investments suffer during a recession. Interest rates are dictated by the Federal Reserve and any subsequent rise in interest rate affects your investments. It is very important to be aware of how your investment portfolio will act in response to these different set of stressful circumstances.
The U.S. Market
The U.S. market usually remains undisrupted during certain scenarios while other parts of the world such as Greece will struggle in the same conditions. Even though, the U.S. may enjoy some good in the market, which subsequently passes down to investors like you, nothing last forever – even good things have to come to an end. Therefore, when the Chinese economy experiences a slowdown, the Federal government might raise the interest rate.
You should be concerned about the market when oil prices are weak and baby boomers begin to leave the workforce. If the market comes to a brief halt, you may find it financially stressful with cause for alarm, but you should remain calm and in control of knowing what is going on with your retirement savings. Your financial advisor would do the stress test of your portfolio to see where it falls or rises. What does that mean? The stress test will indicate what to expect in the worst conditions and if your portfolio will be able to withstand it. Sometimes, it is all in the risk that you take. Too much risk is not good for your investment portfolio. You are headed for a stressful situation, if you do.
A few people will know the risk and still be comfortable with it. However, for the majority, the opposite is true. There are many investors who would pull their investments if they hear that the market was in any kind of turmoil. This was what took place in 2008 and it was not a good decision. Why? Well, investors that pulled out of the market once it hit the bottom were sorry four years down the road. They took on that financial stress without the patience to wait it out to regain what they had lost. While the fall in the market may have been scary, had they waited, they could have rallied back.
The Bottom Line
If you used stress testing as a viable tool to managing your investment portfolio, you will find that a reduction in the market is no reason to be immediately alarmed. However, you have to understand the meaning of true loss. If you truly are scared and you have assessed where you are as it relates to your investments and you feel uncomfortable about your position, then it is time to revise your investment portfolio, taking the risks out.