Scenarios is an interactive feature that helps to align your client's or prospect's portfolio with just the right amount of risk they are comfortable with. In this article, we’ll review how Scenarios can be used to present a forward-looking forecast of how your client's or prospects portfolio would perform (Stress Test Mode) and a historical comparison based on actual performance during the market scenario selected (Historical Mode). Let's check it out!
In this article
When viewing a CURRENT or PROPOSED Portfolio, click the SCENARIOS tab. From here you can use the toggle switch to go back and forth between Stress Test mode and Historical mode.
Using Stress Test Mode
Stress Tests answer questions like: How would my portfolio perform if we have another Financial Crisis? What if another Bull Market like what occurred in 2013 were to happen again? The power of a Stress Test is realized when you can illustrate to your client just how much risk their CURRENT or PROPOSED portfolio has and what that means to their potential returns. Imagine a conversation with your client going like this:
"Now that we've looked at how your portfolio would perform if another 2008 Bear Market were to happen, let's compare that to how the U.S. Stock market would perform in the same Bear Market. Are you comfortable with your portfolio's potential return if it meant your potential loss would be less than the U.S. Stock Market?"
Your client's eyes should widen and an imaginary light bulb should appear over their head when they understand the impact of investing with a portfolio that is aligned with the amount of risk that is right for them.
To take it a step further, you can add additional comparisons (see Portfolio Comparisons below) such as other previously created client CURRENT or PROPOSED portfolios, model portfolios, or market benchmarks to further illustrate how much risk is just the right amount for your client.
Using Historical Mode
New with scenarios is Historical Mode! Select your market scenario and Nitrogen will display how your client’s CURRENT or PROPOSED portfolio actually performed (using actual performance) during past market events. Similar to the Stress Test mode, comparing your client’s portfolio to the US stock market and other comparisons of your choice will be available here, too.
Portfolios will have performance data if all investments within the portfolio are recognized by Nitrogen for the time period being modeled. If an investment isn’t available for the respective time period, Nitrogen will remove that holding and identify that holding has been removed from the analysis. See the ℹ️ icon for those details.
Note: The stress test model is devised to model the historical performance of the portfolio should a chosen historical market scenario recur. Rather than displaying the actual historical performance of the portfolio, it anticipates the portfolio's response to the same market conditions in the present, accounting for the prevailing portfolio-benchmark dynamics. In contrast, a historical simulation captures the modeled historical performance during a chosen past period, focusing solely on the securities within the portfolio that have historical performance data from the selected period.
Interested in modeling how a portfolio would perform if we saw another market like 2016 or how a portfolio performed from 2015 to present? Using the Custom functionality, you can!
1. Once you have made an adjustment to the start date or end date slider, you have the ability to create your Custom Scenario. Start by clicking “Save Scenario.”
2. Next, you'll want to add a new name for your custom scenarios and then click save. After your Custom Scenario is created, it will appear in the Market Scenario dropdown.
Editing a Custom Scenario
- To EDIT or DELETE a Custom Scenario, click the three dots icon in the upper right-hand corner. To edit a previously saved Custom Scenario select EDIT.
2. You can now change your Custom Scenario name or date range. Click “Save” to complete your changes. If you wish to DELETE a Custom Scenario, select your desired Scenario and click DELETE
Adding Portfolio Comparisons
Whether viewing Scenarios in Stress Test mode or Historical mode, you can use up to six comparisons to illustrate the amount of risk your client has is either too much, too little or just enough. Like the Goldilocks and the three bears.
1. To add a comparison, click
2. Next, select a category.
3. Each category allows you to make a different comparison:
CLIENT PORTFOLIOS - access any of your previously created current or proposed portfolios.
MARKET BENCHMARKS - use proxies such as the U.S. Aggregate Bond Index or iShares MSCI Emerging Markets to see the difference in performance compared to your client's portfolio over a selected time frame.
MODEL PORTFOLIOS - demonstrate the impact your recommendation can have on your client’s or prospect's investing success.
4. When viewing a Historical scenario with multiple comparisons you’ll be able to confidently portray to your clients what the right amount of risk looks like based on their comfort level. Hover over any point in time to see the returns of your portfolio comparisons.
Note: The maximum number of comparisons available to view at one time is six.