Fewer than one in five U.S. adults feel ‘very confident’ about their saving habits, according to NFCC’s 2019 Consumer Financial Literacy Survey. While this is a bit alarming, it’s also not all that surprising. Financial literacy is often low among the general population and severe debt is a very common experience. Financial literacy is generally much higher among those with a well-diversified investment portfolio.

This being the case, it seems logical that portfolio stress testing should be a popular way to account for potential market risks and get a gauge of how major world events may affect your personal investment. Stress testing a portfolio can be done quickly and easily by financial institutions.

What Is Portfolio Stress Testing?

Portfolio stress testing is all about seeing how different economic scenarios might affect the portfolio in question, as well as other investments you may have. These scenarios can include an oil crash, accounting for severe inflation, and many other possible outcomes of the market today.

How Does it Work?

When conducting a portfolio stress test, financial planners will construct various “what if” style scenarios. These are often based on real-world macro-economic uncertainties, making them useful for realistic future planning. The potential impacts on your overall portfolio are then measured and reported back.

How Effective Is it?

Stress testing a portfolio in this way isn’t about making actual predictions about the market’s future, but more about identifying downsides and potential risks and then accounting for them. Stress tests like these can also show any major weaknesses in portfolios and help investors manage them more effectively.

Portfolio stress testing is a great way to understand how your personal investment may be affected by major world events and potential market fluctuations. While it can’t predict the future of the market, it can serve as a good measuring stick for potential investments and financial risks you may consider taking.

Financial literacy is helpful to people in all stages of their financial lives. While investing may seem high-stress and mysterious to the average person, it doesn’t have to be. Start small as you learn about your finances and work to understand why you manage your money the way that you do. This and the help of a good financial advisor will place you years ahead of where you might otherwise be.