Why 401(k) advisers should stress-test client portfolios

April 29, 2019

Managing risk and return is a central responsibility of every investment fiduciary.

Asset allocation and securities selection are the blunt instruments used to shape the contours of a portfolio's risk and return profile. The process of building and managing a portfolio is necessarily imprecise because of uncertainty associated with variables inherent to financial markets (endogenous factors) and unexpected major shocks in the world at large that can have financial repercussions, such as geopolitical events or natural disasters (exogenous factors).

While exogenous factors are essentially unpredictable, the financial crisis of 2008 led to increasing attention to the development of better methods to evaluate the impact of endogenous factors — most notably, stress testing.

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