What Is How to Stress Test Your Portfolio Before the Next Crash?
Portfolio stress testing applies historical market shocks to your current holdings to estimate potential losses. Common scenarios include the 2008 financial crisis, the 2020 COVID crash, interest rate shock cycles, and geopolitical conflict impacts.
Why It Matters
Stress tests reveal whether your portfolio's theoretical risk metrics hold up under extreme conditions. Many portfolios that appear well-diversified in normal markets show severe concentration risk when correlations spike toward 1.0 during crises.
How LyraIQ Approaches This
LyraIQ's shock simulator models six historical scenarios against your portfolio: 2008 financial crisis, 2020 COVID crash, 2022 rate hike cycle, dot-com bust, emerging market crisis, and oil shock. The system shows which positions would be most impacted and suggests risk-adjusted alternatives.
Practical Steps
- Select 3-5 relevant historical stress scenarios for your market
- Apply scenario returns to each holding based on its beta and sector
- Calculate total portfolio loss under each scenario
- Identify the 2-3 holdings that contribute most to stress losses
- Adjust allocations to reduce vulnerability to the most likely scenarios