US banks with more than $50 billion in AUM are required to have stress tests to look at unfavorable economic scenarios, such as a deep recession or financial market crisis to see how they will do in these situations. The stress tests are done both internally and by the Federal Reserve System.
Jamie Dimon, CEO of JPMorgan Chase, is a great fan of Stress Tests and at the bank they run hundreds of Stress Tests a month, some of which are more severe than the annual Stress Test run by the Fed. If you want to learn more about how Stress Tests work and how they are done at JPMorgan Chase, I suggest that you read Jamie Dimon's last letter to shareholders.
What about us? Should we run Stress Tests as well? Charlie Munger, Vice Chairman of Berkshire Hathaway, says that we should always look for the worst case scenario and then reverse engineer to make sure that it doesn't happen. Well, we need to Stress Test our portfolio too. We need to look at different bad scenarios, a market crash similar to 2008, a market correction similar to 2018, an oil crash similar to 2014.
In my article today, on my research partnership, I talk about how you should run Stress Tests on your portfolio, using my own portfolio as an example. You can read the whole article here: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/13514654
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