Modelling a Market Crash Event and Major Loss Event Settings

This article guides you through setting up a Market Crash Event and the Market crash settings. These settings apply to both the Major Loss Event and the Market crash Insight.

Market Crash Event

A major loss event (or events) can be added to a planning timeline to create a fluctuation in what would normally be the software's fixed, deterministic growth projections.

Create a 'What If' plan to set up a Market Crash scenario. Then go to Dashboard - + button bottom right - Event. 

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Select the Major Loss event. Use the Edit Timing part of the window to set when this Market crash is in the plan. You can add in more than one event if needed by repeating this process.

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Check it's set up how you would like by viewing the Assets chart and seeing the drop of investments and pension balances in that year. 

Check in Year View - Investment and Pensions tab - Net Growth column. Scroll to other years to see it return to the normal value.

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Produce a report of this What If scenario to capture the Market Crash output.

Setting Major Loss event defaults in Plan Setting

The default settings used by Major Loss events are in the Major Loss section of Plan Settings.

In Dashboard go to Plan Settings - Major Loss:

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Default Age 

This entry sets a default age for the Market Crash Insight and when selecting the Major Loss Event. This is the age of the primary client at which the market fluctuation will begin, at least by default. This can easily be changed to a different year if needed.

In the Market Crash Insight edit the age that the Market crash start by selecting the drop down highlighted below:

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If using a Major Loss Event click and drag the slider or select a different age/year.

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Fixed Growth and Allocation Percentile

You are invited to enter details of a deviation lasting anywhere from 1 to 5 years, as well as the magnitude of the proposed deviation – please note the 2 columns:

  1. Fixed Growth
  2. Allocation Percentile

The number of years set in this field makes a respective number of fields editable below, in which to set the magnitude of the deviation.

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Fixed Growth – what does this refer to?

Applied if the investment is growing by 'Entered Growth Rate'.

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Thinking about a 'market crash' in terms of finite, 'fixed growth' percentage values requires that one disregards, or sets aside, questions about the specific, underlying combination of investment holdings within one's investment, and/or pension accounts. Consequently, a 'fixed growth' market crash is one that will be applied equally to an account invested entirely in, e.g., fixed interest holdings, as to an account invested entirely in emerging markets equities. The use of 'fixed growth' rates, therefore, requires one to set aside (for the moment) the reality that investment returns are, inherently, probabilistic in nature, i.e, risk-based.

 

Allocation Percentile – what does this refer to?

Applied if the Investment is growing by 'Portfolio/Holdings' with entered Asset Allocations in the Portfolio section:

mceclip10.pngInvestment returns are 'probabilistic' in nature (i.e. unpredictable, except in terms of statistical probability), but some outcomes, of course, are more probable than others. Consequently, for any given asset class (or combination of asset classes), there is a 'probability distribution' (based on past performance), which shows the likelihood of achieving any particular return (in any single year). The distribution also sets bounds on the range of (assumed) possible returns, relative to the assumed long-term mean. Typically, it is assumed that investment returns are 'normally distribute' and are, therefore, assumed to conform to a symmetrical 'bell curve' type distribution. The allocation percentile, therefore, refers to a position 'under the curve', along the continuum of (assumed) possible outcomes, between the 0th percentile (worst possible return), approximately 3 standard deviations below the long-term mean return, and the 100th percentile (best possible return), approximately 3 standard deviations above the long-term mean return. The assumed long-term mean return sits (by definition), of course, on the 50th percentile, straight down the middle of the bell curve.

For users who choose to derive investment returns (for investment/pension accounts) based on an underlying asset allocation, the practical upshot is that one will need to specify a 'market crash' in terms not of the investment outcome itself, but in probabilistic (i.e. percentile-based) terms. For users unfamiliar with these concepts, it may be useful to refer an actual 'bell curve' distribution, such as the one shown in the accompanying 'primer' to using Voyant's market-based functionality, linked-to here >>>

Read More on growing by Asset Allocation

Growing an Investment or Pension using a Portfolio with Asset Allocation *AdviserGo*

Read about the Market Crash Insight

>> Market Crash Insight