Stress Testing

The two types

• Historical scenarios — the portfolio is modeled against actual historical episodes (2008 financial crisis, 2020 COVID drawdown, 2022 rate-hike cycle, dot-com bust).
• Hypothetical scenarios — designed scenarios that may not have happened (rates +300bps in three months, oil to $200, USD devaluation).

What stress tests communicate

Stress tests answer three questions clients want answered in plain dollars:

1. "In a 2008-like scenario, how much would I lose?"
2. "How long historically did it take for portfolios like this to recover?"
3. "What income or distribution capacity would I have during the drawdown?"

Why stress tests matter for compliance

The SEC has consistently flagged the gap between client risk-tolerance scores (often abstract) and the portfolios they actually hold (often concrete). Stress tests bridge that gap by translating both sides into dollars. A documented stress-test conversation, signed or acknowledged by the client, anchors the suitability file with a number the client cannot later say they didn't understand.

Best-practice cadence

• At onboarding — paired with the IPS sign-off.
• Annually — refreshed at the same time as the IPS review.
• At material strategy changes — new asset class, large concentration, fund replacements.
• After major market events — reset the conversation while the experience is fresh.

How StratiFi thinks about stress testing

A stress test is most useful as a conversation tool, not as a compliance artifact. The firms that benefit most pair the test with a written discussion summary — what scenarios were shown, how the client responded, whether any portfolio adjustments resulted — and store that summary alongside the IPS. When an examiner asks how the firm communicates risk, the answer is in the file.