Stress Testing Add-on

There are several ways to stress test a financial projection to help answer your client's what-if questions and increase confidence in your recommendations. This could be done by copying an existing projection and changing the rate of return assumptions to a different value. Or, you could use the Stress Testing Add-on to apply historical rates or randomly generated rates to your projections to demonstrate volatility and sequence of return risk.

With Stress Testing, you can apply historical rates of return or randomly generated rates of return to your projections to demonstrate volatility and sequence of return risk.

To see Stress Testing in action, here are a few options.

• Watch a 10-minute video overview. 
• Watch a recording of the 60-minute webinar about this feature.

This add-on is $9 per month or $96 per year depending on your current payment frequency. Add-ons can be activated and deactivated at any time. Charges are prorated, which means you pay only for the days when they're active.

You can enable this add-on by selecting Run Historical Scenario or Run Randomized Scenario from the Planning page, which you can find under the Run Scenario dropdown.

You can also activate or deactivate the add-on from your Billing Settings page as an Operations Manager for your organization. If you don't have access to this page, you can send an email to [email protected] and we'll be happy to help.

Activations and deactivations will be effective immediately and prorated based on where you are in the current billing cycle. Debits are charged by the end of the next business day. Credits are applied to the next scheduled payment.

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As an important note, stress-tested scenarios (using variable rates) aren't intended to replace your base financial projection. First, create a financial projection using the standard Snap Projections functionality and your preferred rates for inflation and investment returns. For instance, you could choose to use the FP Canada Guideline Assumptions to generate a long-term financial projection to make recommendations to your client. This will apply consistent annual rates for inflation and investment returns to minimize variability and allow you to focus on strategic decisions (for example how quickly to pay off debt, how to withdraw money in retirement, when to retire, and whether to commute a pension).

Once you've completed a base plan, you can copy the existing projection to complete stress testing on the copied version. Apply historical or randomized rates for inflation and investment returns to the copy to see how those potential rates would impact your client's projections. For instance, would the client still achieve their goals if the next 30 years replicated the investment returns and inflation rates from 1990 to 2020? Or, what might their final estate be if they lived through the 20th worst return sequence from a set of 101 potential outcomes?

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Run Historical Scenario is one of the two features in the Stress Testing add-on. It allows you to select a period from the past and apply investment returns and inflation rates from the period to the current scenario.

You can use this feature to perform stress testing through several methods. You could Apply & Run multiple historical periods to your plan to see how frequently the clients achieve their goals. You could also choose a poorly performing period to see the outcome if rates were variable and lower than expected. These methods allow you to illustrate how lower returns or different sequences of returns can impact a projection which is particularly important for retirement planning.

We created Run Historical Scenario to give you the ability to:

• find and model natural sequences of returns with their ups and downs (instead of flat sequences, typically used for financial projections).
• show a range of outcomes between the worst and best case for the period length you've selected from a historical set of realized inflation and investment returns.
• get an approximate indication of how likely your clients are to achieve their goals in the historical context (you can use this feature to perform a basic form of stress testing).
• illustrate the importance of the order of returns to your clients.

Running a Historical Scenario

If you want to find and model a historical sequence of investment returns, you have a couple of options.

1. Find a period with a specific average return.
2. Find a specific historical period and align it with a future period.

a. Find a period with a specific average return that you have in mind.

1. Open the historical modal by clicking the dropdown beside Run Scenario and then selecting Run Historical Scenario.
2. Set the length of your selection (using the zoom buttons in the top right corner of the modal, for example). Try to make it similar to the length of your scenario, if possible. It will make it easier to align the averages in steps 3 and 5.
3. Update the asset mix to your client's approximate weighted portfolio asset allocation (for example 30% fixed income and 70% equity).
4. Adjust the slider until you find an average return suitable for the scenario. If you cannot find a suitable rate of return, you can try to reduce the length of the selection and/or enable inverted selections to widen the range.
5. Apply and Run the scenario.
6. Review the average rates of return in the report.
7. Go back to step 4 if necessary.

b. Find a specific historical period and align it with a future period.

For example, you may want to align a past recession with a future retirement.

1. Calculate the number of years between now and the beginning of the future period (for example your client's retirement in 6 years).
2. Open the historical modal by clicking the dropdown beside Run Scenario and selecting Run Historical Scenario.
3. Find the year and month that you would like to align with the future period (for example having the year 2000 align with your client's age of 65 in 6 years).
4. Select a historical period that begins the same length of time before your desired period (for example select a period that begins in 1994 so that 2000 aligns with retirement in the plan).
5. Apply and Run the scenario.

A complete explanation of the Run Historical Scenario feature provides assumptions, calculations, use cases, and more.

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Run Randomized Scenario is the other feature included in the Stress Testing add-on. It allows you to generate a randomized set of annual values for inflation and rates of return. This is done by combining your expected rates for these variables with historical volatility (or your preferred market assumptions) to model a range of potential future outcomes.

• generate and model sequences of returns with their ups and downs (instead of flat sequences, which are typically used for financial projections).
• show a range of outcomes anywhere between the worst and best case from a set of 101 randomly generated sequences.
• get an approximate indication of how likely your clients are to achieve their goals (you can use this feature to perform a basic form of stress testing).
• illustrate the importance of the order of returns to your clients.

Running a Randomized Scenario

If you want to find and model a randomized sequence of investment returns and inflation rates, there are two main use cases.

1. Select a sequence from a range of 101 randomly generated rates.
2. Select a randomized sequence with actual average returns aligned with your expected returns.

a. Select a sequence from a range of 101 randomly generated rates.

• Open the randomized modal by clicking the dropdown beside Run Scenario and then selecting Run Randomized Scenario.
• Update the asset mix to your client's approximate weighted portfolio asset allocation (e.g., 30% fixed income and 70% equity) and select Update.
• Adjust the slider below the graph until you find a location (e.g., 20, 30, 50) or an average real return (e.g., 2%, 3%) that you would like to model.
• Apply and Run the scenario.
• Review the planning page and report.

B . Select a randomized sequence with actual average returns aligned with your expected returns for Cash, Fixed Income, Equity, and Inflation.

• Open the randomized modal.
• Enable Align actual with expected.
• Click Randomize Again.
• Apply and Run the scenario.

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