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 in Snap to apply historical rates or randomly generated rates to your projections to demonstrate volatility and sequence of return risk.

Activating the Stress Testing Add-on

Stress Testing is an add-on that allows you to apply historical or randomly generated rates of inflation and investment returns to the current scenario. Stress Testing shows you a range of potential outcomes, demonstrating the sequence of return risk, helping you to answer client questions, and more. The add-on allows you to 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.

The price of 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. If you don't have access to this page please contact your team's administrator or send us an email at [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.

Copying your plan

As an important note, stress-tested scenarios (using variable rates) aren't intended to replace your base financial projection. You can 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 for the purpose of making 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 (e.g., how quickly to pay off debt, how to withdraw money in retirement, when to retire, and whether to commute their pension).

Once you've completed a base plan, you can copy the existing projection so that you can complete stress testing. You can then apply historical or randomized rates for inflation and investment returns to your projection to see how those potential rates would impact your client's projections. For instance, you can see whether they'd still achieve their goals if the next 30 years replicated the investment returns and inflation rates that we saw from 1990 to 2020. Or, you could see how much their estate might be if they lived through the 20th worst return sequence from a set of 101 potential outcomes.

Run Historical Scenario Feature

Run Historical Scenario is one of the two features included in the Stress Testing add-on. It allows you to select a period from the past and apply investment returns and inflation rates from that period to the current scenario. The other feature is Randomized Scenarios, which allows you to generate a sequence of returns for your plan based on your expected average rate of return and historical volatility (or your preferred market assumptions).

Historical returns create the ability to discuss market volatility, historical performance, and managing risk that isn't as easy through a plan with consistent annual returns, which are typically used for financial projections. Historical returns are often easier to explain to clients since they either lived through the period or have heard references to events in the given period to be able to contextualize the selected market returns.

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 how the plan would perform if rates were both variable and lower than expected. These methods will allow you to illustrate how lower returns or different sequences of returns can impact the outcome of 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, which are typically used for financial projections).
show a range of outcomes anywhere between the worst and best case for the period length that 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:

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

Open the historical modal by clicking the dropdown beside Run Scenario and then selecting Run Historical Scenario.
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.
Update the asset mix to your client's approximate weighted portfolio asset allocation (e.g., 30% fixed income and 70% equity).
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.
Apply and Run the scenario.
Review the average rates of return in the report.
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):

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

A complete explanation of the Run Historical Scenario feature is available here. The article includes assumptions, calculations, use cases, and more.

Run Randomized Scenario Feature

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 to model a range of potential future outcomes.

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

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

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:

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 that has actual average returns that align with your expected returns for each category (i.e., Inflation, Cash, Fixed Income, Equity).

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

A complete explanation of the Run Randomized Scenario feature is available here. The article includes assumptions, calculations, use cases, and more.