In addition to income, expense, investment, and debt projections, we also offer more holistic scenarios like "2008 Financial Crisis, "2010 Financial Boom" and "Oil Shock", which are designed to simulate how your portfolio might perform during these types of significant market events. This article explains the methodologies behind those events and offers suggestions for using them in your planning.
For all three of these events, we make projections relying on FinMason, a leading provider of data for financial planning institutions. When you add one of these events to your timeline, we send an anonymized version of your investment portfolio to FinMason. If historical return data is available for your investments, FinMason returns to us the way that each of your stocks, funds, or other investments performed through that historical event. If data on your particular investment is not available, FinMason selects a proxy (such as market proxies, individual fund returns, or security level returns) that is in the same general asset class as the investments in your portfolio. Then, they provide us with information as to how that proxy performed during the relevant historical period, along with additional information such as expected return and expected volatility analytics.
Based on the FinMason information about how each of your investments (or the relevant proxy) would have performed during the historical event that you’ve selected, we simulate the impact of that historical event on your portfolio and then project the performance out into the future beyond the simulated event using the 50th percentile Monte Carlo models provided by FinMason.
Examples and specific details for each of these events are included below. Please note that these scenarios are hypothetical illustrations that do not reflect the actual performance of your portfolio during these historical events. These scenarios are subject to significant limitations, including that if My Financial Plan does not have access to information about the specific positions in your investment or retirement account, it will use a single broad stock market index ETF as a proxy (or substitute) for all the positions in that account. This proxy may not be representative of the actual positions in your account.
Depending on which investments you held during the 2008 financial crisis, you could have done very well (Walmart +19.5 percent), very poorly (AIG $825 per share to $22), or somewhere in between.
AIG Stock Performance 2008
The 2008 Financial Crisis event estimates what would happen to your portfolio if that historical event repeats itself. Of course, it won’t repeat exactly, but this is a good way of stress-testing your financial plan with a real historical event that most of us actually lived through.
Following the simulated 2008 Financial Crisis event, we use a Monte Carlo projection at the 50th percentile to project into the future.
This event is the mirror image of the 2008 financial crisis. In the two years following the 2008 financial crisis, the S&P 500 index returned 23% and 14% in 2009 and 2010 before flattening out in 2011.
S&P 500 Index Performance 2008 - 2011
Using FinMason data, the 2010 Financial Boom event maps your investments to the historical market recovery starting in March 2009 and continuing over the next two years. Following the two-year simulated event, we use a Monte Carlo projection at the 50th percentile to project into the future.
Of course, the exact returns from 2009 and 2010 will not repeat themselves again, but this event simulates what could happen if a similar scenario occurs in the future.
As described in this article posted by Yale University, "In October 1973, the Arab state members of the Organization of Petroleum Exporting Countries (OPEC) declared that they would cut oil production, and limit exports to certain countries. American policymakers believed that this decision, which they called an “embargo,” would raise the market price of oil and would lead to shortages of oil in the United States.”
In response, the US instituted a rationing program intended to protect American oil supplies and ensure continued low prices. These policies helped lead to shortages at gasoline stations. The result was that the U.S. economy suffered simultaneous recession and inflation (termed stagflation).
This event in My Financial Plan mimics the effect of those historical events on your investment portfolio using FinMason data and using a Monte Carlo projection at the 50th percentile to project into the future.
For financial planning, this event is a way to simulate a high inflation/low growth environment on your investment portfolio.
All investing involves risk, including the possible loss of money you invest. Any future projections provided in My Financial Plan are hypothetical, do not represent the performance of actual accounts, and are not a guarantee of future results. The projections My Financial Plan presents to you are dependent on the accuracy, reliability, and completeness of the data you provide, including any third-party account information. Past performance does not guarantee future performance. Historical returns, expected returns, and probability projections are provided for informational and illustrative purposes only.
For more details on these projections, download the "FinMason Factors and Stress Testing" white paper.