You will be able to estimate how your portfolio would have done in past crises and in a shock you design.
Marcus's Value at Risk from lesson 2.6, Value at Risk, expected shortfall and fat tails, said a bad month might cost him about S$12,900, and an average bad month about S$17,300. Both figures came from five years of his own history, which contained no real crisis. Lesson 2.6 warned that historical figures are a floor, never a ceiling. This lesson builds the other half: running today's portfolio through the worst periods markets have produced, and through a shock history hasn't shown yet, so the number he signs up for is in Singapore dollars and written down.
Holdings are Marcus's made-up figures, about S$202,000 in all. Every scenario loss below is a made-up figure, chosen to be of a similar scale to the real episodes. Look up the actual index data for your own test.
A stress test estimates what a portfolio would lose in a specific severe scenario. The historical version takes a past crisis and asks what today's holdings would have done in it, using an index as a stand-in, or proxy, for each holding you didn't own then.
Marcus picked two periods. The first is a 2008-style crisis: a long, deep fall in shares worldwide, with credit drying up. The second is a 2020-style crash: a fall of similar speed but shorter, in which even some bond funds dipped for a few weeks. For each holding he chose a proxy and a loss in SGD from peak to trough, with made-up figures. In the 2008-style case: world equity minus 45%, the STI minus 55%, Singapore banks minus 55%, S-REITs minus 60%, small chip suppliers minus 65%, US chip designers minus 60%, his SGD bond fund plus 3% and T-bills plus 1%. In the 2020-style case: world equity minus 28%, the STI minus 30%, banks minus 33%, S-REITs minus 35%, small chip suppliers minus 40%, US chip designers minus 35%, the bond fund minus 2% and T-bills flat.
Multiply each holding's value by its proxy loss and add them up. The 2008-style case costs Marcus about S$81,150, about 40.2% of his portfolio. The world ETF alone accounts for about S$41,000 of that. The 2020-style case costs about S$50,000, about 24.8%.
Measure proxies in SGD. In 2008 the US dollar rose against most currencies, which cushioned the fall in US assets for a Singapore investor, the effect lesson 3.5, The dollar cycle and what a strong dollar does to Asian assets, described. An index loss quoted in US dollars would overstate that part of his loss.
History only contains the crises that happened. The one that worries a portfolio like Marcus's most hasn't been tested by his own data at all: interest rates rising sharply while shares fall, which hits his bonds and shares together, as 2022 did on a smaller scale.
So he designed one. Singapore and US yields rise two percentage points and shares fall 20%. With made-up figures, his world ETF falls 20%, the STI 15%, the bank 10% because higher rates help its margin, the S-REIT 25% because rates hit property values, Larkspur 30% and the chip designer 35% because distant profits are worth less at higher rates, as lesson 3.3, Real rates and breakeven inflation from inflation-linked bonds, explained. His bond fund, with a duration of 6.5, falls about 13%, the duration arithmetic from lesson 2.5, Duration is the risk number for bonds. T-bills lose half a percent.
The total is about S$37,400, about 18.5%. It's the smallest of the three losses, but it's the only one in which his bonds lose about S$3,900 at the same time as his shares, so the 20% he holds for protection doesn't protect.
Percentages make losses feel abstract. S$81,150 doesn't. It's about ten years of Marcus's yearly deposits, and more than he's made from investing in five years. Writing the loss in dollars is how you find out whether you'd really hold through it, which is the question lesson 2.2, Drawdown and time under water are the risks you feel, said matters more than any ratio.
Marcus's rulebook says no scenario may cost more than 40% of the portfolio, about S$80,800 today. The 2008-style case breaks it, narrowly.
If a stress test breaks your rules, change the portfolio on a calm day. Waiting until the crisis means making the change at the worst prices, under the worst pressure.
Marcus reran the tests on the portfolio he'd have after the trims his limits already required: bank, S-REIT and chip designer back to their targets, with the S$14,720 from those sales added to his world ETF. The 2008-style loss fell to about S$79,200, about 39.2%, inside the rule. The 2020-style loss fell to about 24.3%, and the rates shock to about 18.2%.
The changes are small, and that's the honest finding. Reshuffling within his shares barely moves a crisis loss, because the loss comes mainly from holding 80% in shares at all. If he wanted the 2008-style figure far lower, the lever would be his allocation, which belongs to his investment policy from Build and run an ETF portfolio, module 8, Write your investment policy and review it every year. He noted the rates shock as a question for his next yearly review: whether part of his bond fund should move to shorter duration.
For the activity, you'll need your holdings in SGD, a proxy index for each, and that proxy's loss in two historical periods, from the index provider's data, plus one shock of your own design.
Estimate your portfolio's loss in SGD in two historical periods and one made-up shock, using index proxies for each holding.
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